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THE 



ELEMENTS OF ECONOMICS 



BY 

CHARLES J. BULLOCK, Ph.D. 

PROFESSOR OF ECONOMICS IN HARVARD UNIVERSITY 



SECOND EDITION 




SILVER, BURDETT AND COMPANY 

BOSTON NEW YORK CHICAGO 



h 



Copyright, 1905, 1913, 
BY SILVER, BURDETT & COMPANY 



if^fM a o k 1 ft a o 



PREFACE 

This book has been written in response to a demand 
for a somewhat shorter and more elementary work than 
the "Introduction to the Study of Economics," which 
the author brought out in 1897. In order to meet this 
demand, it was necessary to make a substantially new 
book, in which the substance of doctrine and the gen- 
eral groundwork remain the same, but the method of 
treating most subjects has been more or less radically 
altered. Less space has been devoted to purely theo- 
retical questions and more descriptive and illustrative 
material has been presented. 

It is hoped that the present treatise will meet the 
needs of a relatively short course for beginners in eco- 
nomics. As the work stands, it is probably extensive 
enough for the longest courses now given in secondary 
schools. If it is found too long for some of the shorter 
courses, the instructor can easily adapt it to the needs 
of his class by making a few omissions. The first chap- 
ter can be treated in an introductory talk or lecture on 
the first day that the class meets; and the tenth and 
fifteenth chapters, treating, as they do, topics that are 
seldom discussed at length in an elementary work, can 
be readily omitted. With a few changes of this sort, 



IV 



PREFACE 



the book can be adapted to a course of only twelve or 
thirteen weeks. 

The author is under obligations to various friends, 
colleagues and others, for material assistance in the 
preparation of this work. He wishes to make special 
acknowledgment of the aid- received from Professor 
T. N. Carver, particularly in connection with the fifth 
chapter, and of the constant help received from Mrs. 

Bullock. 

CHARLES J. BULLOCK. 
Cambridge, Mass., 1905. 

Preface to the Second Edition 

In this second edition such changes have been made 

in the text as the events of the last eight years have made 

necessary. The statistical materials have also been 

brought up to date, except in chapter I, where statistics 

of occupations for a later year than 1900 are not yet 

available. 

CHARLES J. BULLOCK. 

Cambridge, May 17, 1913. 



CONTENTS 



CHAPTER I 

PAGE 

Introduction: The Science of Economics . . . . i 



CHAPTER II 

The Consumption of Wealth 10 

I. Human Needs : Wealth io 

II. The Laws of Consumption 13 

III. Statistics of Consumption . . . c . . .21 



CHAPTER III 

The Production of Wealth 29 

I. General Survey 29 

II. The Factors of Production 32 



CHAPTER IV 

The Organization of Productive Industry . . . .55 

I. The Organization of the Factors of Production . . 55 

II. Business Corporations . . . e . .60 



CHAPTER V 

The Laws of Production : The Variation of Productive 

Forces 74 

I. The Law of Diminishing Returns 74 

II. The Law of Economy in Organization .... 82 

III. The Laws of Supply 91 

v 



vi CONTENTS 

CHAPTER VI 

PAGtf 

The Theory of Exchange . « . . . . . .97 

I. The Advantages of Exchange 97 

II. Market Value » 98 

III. Normal Value . 103 

IV. Exceptions to the Theory of Normal Value . . .112 

CHAPTER VII 

Money and Credit . 116 

I. Metallic Money . . 116 

II. Credit and its Instruments ... . . . .123 

III. The Laws of Money . . . , . . .128 

CHAPTER VIII 

Problems of Money and Banking ...... 143 

I. Government Paper Money ...... 143 

II. Banks as Institutions of Credit 149 

III. Bimetallism t .158 

CHAPTER IX 

Monopolies 167 

I. Introduction , 167 

II. Monopoly Value 171 

III. Natural Monopolies . . , 174 

IV. Capitalistic Monopolies 180 

CHAPTER X 

Railroad Transportation . 198 

I. Railroad Competition and Combination .... 198 

II. Railroad Rates . 208 

III. Public Control of Railroads . . . . , .216 

CHAPTER XI 

International Trade 226 

I. The Foreign Trade of the United States ..... 226 

II. The Nature of International Trade 229 

III. The Restriction of International Trade .... 240 



CONTENTS vii 



CHAPTER XII 

PAGE 

The Distribution of Wealth 255 

I. The National Income and its Distribution . . . 255 

II. Interest 261 

III. Wages «... 271 

IV. Rent 279 

V. Profits ., 291 

CHAPTER XIII 

The Labor Problem . 297 

I. The Labor Contract ........ 297 

II. Labor Legislation 300 

III. Labor Organizations ..... . 304 

IV. The Relation of Laborers to the Product of their Labor . 318 

CHAPTER XIV 

Projects for Economic Reform ....... 325 

I. The Single Tax 325 

II. Socialism , . , . 330 

CHAPTER XV 

Governmental Revenues 345 

I. The Various Branches of Revenue 345 

II. Federal Taxation in the United States . . . 352 

III. State and Local Taxation in the United States . . . 360 

List of Works of Reference „ .371 

Index . 373 



THE ELEMENTS OF ECONOMICS 



CHAPTER I 

introduction: the science of economics 

§ i. In the year 1900 our twelfth census ascertained 
that 29,285,000 persons were "engaged in gainful occupa- 
tions" in the United States. These workers, Gainful 
constituting not quite two fifths of the total occu P ations - 
population, were employed in a vast number of call- 
ings which may be analyzed roughly into the following 
classes : — 

Mines, forests, and fisheries 778,000 

Agriculture 10,305,000 

Manufacturing and mechanical pursuits . . . 6,468,000 

Trade and transportation 4,778,000 

Domestic and personal service 5,691,000 

Professional service 1,265,000 

Total 29,285,000 

§ 2. If now we subject these statistics to a somewhat 
closer analysis, it will appear that our farms, mines, 
forests, and fisheries employed over 11,000,000 Extractive 
persons, who were engaged in producing the industries - 
foods, fibers, minerals, and lumber required by a nation 
of 76,000,000 people and their numerous foreign customers. 

1 



2 THE SCIENCE OF ECONOMICS 

In the census year 1900 the gross product of all such indus- 
tries was not far from $5,000,000,000. Of this amount 
approximately one fifth was exported to various coun- 
tries; but other raw materials and food stuffs were im- 
ported, the value of which may be placed at $550,000,000. 
Such were the basic processes upon which the ongoing 
of American industry depended. 

Of the 6,468,000 persons engaged in working up raw 
materials into finished products, no less than 2,000,000 
Manufactur- were employed in the so-called hand trades, 
mfchanicai These hand workers included 1,200,000 car- 
pursuits, penters, masons, painters, and other workmen 
in the building trades ; while the remainder were classified 
as blacksmiths, wheelwrights, shoemakers, tailors, seam- 
stresses, and the like. The product of their annual labor 
almost defies statistical measurement, but the very incom- 
plete figures of the census show that the hand trades 
added some $700,000,000 to the value of the materials 
upon which the workmen were engaged. The so-called 
manufacturing industries employed some 4,460,000 per r 
sons, and in the census year added some $4,958,000,000 
to the value of the raw materials which they used. The 
manufacture of iron and steel gave occupation to an army 
of 680,000 men; the cotton, woolen, and other textile 
industries required the services of 597,000 operatives; 
317,000 workers were occupied as bakers, butchers, and 
millers, or otherwise engaged in the preparation of food; 
about the same number were manufacturing ready-made 
clothes, hats, and furnishing goods; some 198,000 factory 
hands were making shoes or other products of leather; 
and 165,000 persons were manufacturing liquors or 



THE SCIENCE OF ECONOMICS 3 

tobacco. These details are sufficient to show the extent 
and character of the secondary industries which work 
over the crude materials supplied by fields, mines, or 
forests. 

In order that the foregoing industrial processes might 
be carried on, it was necessary that 4,778,000 persons 
should be employed in exchanging products Transporta- 
or in transporting persons and commodities, commerce. 
Not less than 835,000 people were engaged in wholesale 
or retail trade, and they required the assistance of 714,000 
salesmen. For the work of transportation some 1,346,000 
persons were required, of whom 582,000 were railway 
operatives and 541,000 were draymen, hackmen, and 
teamsters. In addition to all these, some 1,200,000 
clerks, bookkeepers, stenographers, messengers, porters, 
and* other workers found employment in the field of trade 
and transportation. 

The workers so far described were engaged in producing, 
transporting, or exchanging material commodities; in 
addition to all such work, the people of the „ 

7 r r Personal and 

country required the labor of nearly 7,000,000 professional 
persons who rendered various services, domes- 
tic, personal, and professional. Some 2,600,000 persons 
were classified as common laborers; 1,560,000 were 
employed as servants and waiters; 380,000 were engaged 
in laundry work; while 620,000 followed the callings of 
barbers, nurses, housekeepers, janitors, hotel or restaurant 
keepers, and the like. Then approximately 250,000 
people were enrolled in the army and navy, or employed 
as policemen or firemen in protecting life and property. 
And finally professional service claimed the labor of 



4 THE SCIENCE OF ECONOMICS 

1,265,000 persons. Of these, 446,000 were teachers, 
112,000 clergymen, 162,000 physicians or dentists, and 
114,000 lawyers; the others were employed as engineers, 
architects, artists, actors, musicians, and journalists. 
While these figures may appear large, the whole body 
of persons engaged in professional callings, and minister- 
ing to what may be considered the higher wants of the 
country, was but slightly more than four per cent of our 
entire industrial army. 

§ 3. All of the occupations which have been enumer- 
ated have this one thing in common, that they are modes 
of activity by which our people endeavor to 

Economic J J ... 

activities procure a livelihood. The statistics give a 

and the . . 

science of tolerably accurate description 01 the manner 
economics. ^ ^^ fa e effective labor force of a nation 
of 76,000,000 people was applied in various industries and 
callings for the purpose of producing the nation's annual 
subsistence. Activity of this sort, whenever and wherever 
exerted, forms the subject-matter with which the science 
of economics deals; hence we can provisionally define 
economics as the science which deals with the efforts 0} 
mankind to secure those material commodities and personal 
services which are needed to support life and to make a 
civilized existence possible. 

§ 4. In procuring a livelihood men sometimes produce 
for themselves the precise goods that they require, as is 
Household done by a farmer who draws from his land 
economy. t k e g rea t er p ar t f the supplies needed for the 
support of his family. If all production were carried 
on in this manner, each family would live in a state of 
economic isolation and would have little or no business 



THE SCIENCE OE ECONOMICS 5 

intercourse with the rest of the world. Under such con- 
ditions getting a living would involve nothing more than 
the prudent administration of a landed estate, and the 
economist would find no object of study except the sim- 
ple processes of farm or plantation management. Such, 
indeed, was the scope of what the Greeks called econom- 
ics ; which dealt with nothing more than the adminis- 
tration of private estates, 1 or household economy. 

But, under modern conditions, production for family 
consumption is far less common than the production 
of goods that are intended for the market, social 
Instead of working upon articles destined for industrial 
their personal use, most men are engaged in societ y» 
making things that are to be consumed by others. All 
this presupposes the existence of a complex social life in 
which, through countless acts of exchange, constant com- 
mercial intercourse is maintained between producers and 
consumers. Production thus becomes a social process in 
which the person who cultivates the soil depends upon 
the manufacturer, the trader, or the professional man to 
take his product off his hands and to render in exchange 
some useful commodity or service. Instead of living in 
isolated, independent households, men are closely united 
in a wide- reaching society in which each person is depend- 
ent upon his fellows for most of the things needed for 
the support and ennoblement of life. The economist, 
therefore, is obliged to study the actions of men who are 
living in an organized society; and for this reason, eco- 
nomics deals chiefly with social facts and relationships. 

1 The Greek word olKovo/xia was derived from ofaos, estate, and vd/xos, 
law. 



6 THE SCIENCE OF ECONOMICS 

Sometimes, indeed, in order to emphasize this truth, the 
science has been called social economics. 1 

§ 5. The life which men live in society is concerned with 
many other things besides the effort to procure a liveli- 
other social hood. The range of social activities includes 
th^socST marriage and giving in marriage, the forma- 
sciences. tion anc [ maintenance of civil governments, 
cooperation in educational and religious enterprises, and 
the organization of a multitude of minor associations 
of a serious or frivolous character. All these activities 
may be made the objects of scientific investigation; and 
many of them have been so studied, with the result that 
a group of social sciences has been developed. Politics 
is such a science, dealing with the forms and functions 
of governments. Jurisprudence is another, and is con- 
cerned with the legal rules of conduct which govern social 
relations. History is a social, science which investigates 
the manner in which men have lived in the past, and 
undertakes to recall the social life of bygone ages — in 
the family, the church, the state, and in industrial rela- 
tions. Economics, therefore, is but one of a number 
of related sciences that treat of the social experience of 
the human race. 

At various times efforts have been made to develop a 
single, all- embracing science of society, known 

Sociology. & \ . & J ■ 

as social science/ or sociology. It has been 
maintained that since economic, political, legal, and other 

1 The names " political economy " and " public economy," which also 
are used — ■ the former much more frequently than the latter, — mean the 
same thing, viz. that the science deals with the economy of a larger social 
group, and not the economy of an individual or a household. 

2 The name "social science" has been applied often to the investiga- 



THE SCIENCE OF ECONOMICS J 

forms of social life constantly act and react upon each 
other, it is impossible to construct separate sciences 
of economics, politics, and jurisprudence. But attempts 
to study society as a whole, in all phases of its activity, 
have not met with much success, because they disre- 
garded the simple fact that the field of investigation 
is so vast and the facts to be studied are so varied, that 
some sort of division of labor is indispensable. They 
resemble, indeed, an attempt to construct a single science 
of nature, animate and inanimate, in place of the separate 
sciences of physics, chemistry, biology, geography, and 
the like. More recently, therefore, the scope of sociology 
has been narrowed, and it has been defined as "the science 
of social elements and first principles." The sciences 
of economics and politics take man as they find him, 
existing in economic or political relations with his fellows. 
Sociology, however, when treated as a science of social 
elements, undertakes to explain the primary facts of human 
association. It studies the process by which associations 
of men are formed, investigates the character of social 
groups, and may deal with the question of social 
progress. 

§ 6. We have now defined the field of economics and 
explained its relations to the various social 

The divisions 

sciences. This book is to deal with the social of economic 

... , . , , . , science. 

activities and institutions that result from mens 

efforts to procure a livelihood. Looking at these things 

tion of crime, pauperism, charities, and similar subjects. These topics 
have not been treated adequately by the other social sciences, and the field 
is sufficiently extensive for a special science of dependent and delinquent 
classes of people. The need of inconvenient explanations would be 
avoided, however, if some other name than social science were employed. 



8 THE SCIENCE OF ECONOMICS 

from the point of view of the community, or society, we 
shall study the means by which nations become rich and 
the effect of riches upon the public welfare. Beginning 
with an examination of the needs that impel man to pro- 
duce useful commodities, we shall next investigate the 
processes by which production is carried on; then we 
shall treat of the great process of exchange, and finally 
shall study the manner in which the product of industry 
is divided among the various classes of people who have 
helped to create it. These four main divisions of our 
inquiry are usually termed the departments of consump- 
tion, production, exchange, and distribution. In addition 
to this, we shall consider the ways and means by which 
governments secure the money or services upon which 
they depend for support, and here shall touch upon a 
subject known as public finance. 

This conception of the scope of our science accords with 
that of the eminent economist, Adam Smith, who pub- 
The scope of lished in 1776 his famous " Inquiry into the 
the science. N ature an d Causes of the Wealth of Nations," 
upon which, more than any other work, subsequent writers 
have built. " Political economy," he declares, "proposes 
two distinct objects : first, to supply a plentiful revenue or 
subsistence for the people, or, more properly, to enable 
them to provide such a revenue for themselves; and 
secondly, to supply the state or commonwealth with a 
revenue sufficient for the public purposes. It proposes to 
enrich both the people and the sovereign." Although 
riches are not the sum and end of human existence, and 
the acquisition of wealth is not the noblest of all activities, 
our science will be found neither mean nor sordid. Rather 



THE SCIENCE OF ECONOMICS Q 

will it appear that the study of economics, while dealing 
with matters of the greatest practical importance, tends to 
quicken the love of justice and to encourage sanity and 
moderation of view concerning the value of material 
wealth. 



CHAPTER II 

THE CONSUMPTION OF WEALTH 
I. Human Needs: Wealth 

§ 7. The principal motiye that impels men to produce 
useful commodities is the desire to consume goods that 
Human can be procured only by labor. There are, 

needs. £ coursej other motives for industrial effort, 

such as a mere love of activity or, among men of great 
wealth, the ambition to dominate large business enter- 
prises; but with the majority of people it is certain that 
the necessity of procuring consumable goods is the main- 
spring of economic activity. For this reason we shall 
make human needs and the consumption of wealth the 
starting point of our inquiry. 

Economics is not concerned with all the possible needs 
of man's nature, but investigates only those which impel 
Existence him to secure a livelihood. Of such needs 

and culture . 1 i • 

wants. the earliest and most persistent are the desires 

for food, shelter, and clothing, which we may call man's 
existence wants. With the growth of intelligence and 
refinement, a multitude of new desires is aroused, and 
what may be called culture wants are gradually developed. 
These new wants are directed toward things that tend 
to the enrichment or ennoblement of human life, such as 
material comforts and luxuries or education, art, and travel. 

JO 



HUMAN NEEDS: WEALTH II 

§ 8. In an examination of economic needs we should 
consider the law of the increase and diversification oj human 
wants. The lowest tribes of savages are appar- The increase 
ently satisfied if they can provide themselves Stionof 181 *" 
with a few simple kinds of food and such wants - 
shelter or clothing as the climate renders imperatively 
necessary ; and they begin to progress in civilization when 
the development of their faculties or the awakening of 
new desires leads them out of the circle of their original 
animal needs. In fact the progress of our race from 
barbarism to civilization can be described not inaccurately 
as a process of increase and diversification of human 
wants. When an abundance of the simplest food is once 
assured, men begin to improve the methods of preparing 
it and to search for new edibles with which to vary their 
diet. The same thing occurs with man's shelter and 
clothing, so that, in the course of time, fine houses and 
elaborate dress become favorite means of indulging artistic 
tastes or making an ostentatious display of wealth. With 
man's higher wants the possibility of increase and diversi- 
fication is indefinitely great, especially since the pursuit 
of such things as art or science comes to have for its object 
the development of one's faculties rather than the satis- 
faction of the senses. Under such conditions, although 
the complete satisfaction of some of the lower bodily 
needs is possible, we can discover no limit to the growth 
and diversification of our other wants. 

§ 9. Everything that has the power to satisfy a human 
want is said to possess utility ; and to such things utilities 
the economist applies the names "utilities" or and s° ods - 
''goods." "But there are goods that do not come within 



12 THE CONSUMPTION OF WEALTH 

the range of economic investigation, which deals only with 
the subject of procuring a livelihood. Health, friendship, 
knowledge, and moral worth are among the supremest 
goods ; but they fall primarily to the province of the phy- 
sician, the teacher, or the moralist — not to the economist, 
who has occasion to consider them only in so far as they 
bear upon the main subject of his inquiries, the produc- 
tion and use of the things that constitute a livelihood. 
Material commodities and personal services are the ob- 
jects of all economic activity, and it is of these utilities 
that economics treats. 

The utility, or want-satisfying power, of commodities 
may arise in any one of four ways. An object may be 
The four fitted, as, for example, iron ore, to serve as raw 

kinds of \ , ' r ' ' ' 

utility. material for some manufactured article; in 

which case it is said to have elementary utility. Next, 
after undergoing changes in form, the iron may be con- 
verted into a finished product ready for man's use, and 
will then possess form utility. Again, when transported 
from the rolling mill or machine shop to the place where 
it is desired by the consumer, the product acquires place 
utility ; and herein consists the whole service which trans- 
portation agencies render to society. Finally, many com- 
modities vary in usefulness from one season of the year 
to another, as is the case with ice and fuel. A person who 
stores up ice in the winter and distributes it to his customers 
the following summer creates time utility, which is just as 
important a factor in determining the serviceableness of 
many things as are utilities of form and place. 

§ 10. To the services and commodities that are the 
objects oj all industrial effort, the economist applies the 



THE LAWS OF CONSUMPTION" 13 

name ''wealth." Economics, in fact, has frequently been 
defined as "that science which relates to wealth." In 
common usage this term often means great 

. . . ,. , . . . . , , Wealth. 

nches, but such is not the sense in which the 
economist employs it. To him the poor man's dwelling 
and the rich man's palace are alike wealth, since they satisfy 
economic wants. Wealth has been defined also as any- 
thing that has the power of commanding other things in 
exchange — a definition that is accurate enough for most 
practical purposes, since nothing can be exchangeable if 
it does not satisfy some human desire. But there are a 
few economic goods, such as heirlooms, which, having 
utility for no one except the owner, could not be exchanged 
for anything else, and yet deserve to be included within the 
category of wealth. For this reason preference should be 
given to our first definition. A generation ago wealth was 
usually defined so as to include nothing but material 
commodities, and services were excluded from the scope 
of economic investigation ; but such an arbitrary omission 
of things that form the object of countless business trans- 
actions could not be justified, and has been abandoned 
by most writers. Material goods, whether exchangeable 
or not, and all personal services by which men secure a 
livelihood, are the constituent parts of wealth. 

II. The Laws of Consumption 

§ 11. By the consumption of wealth is meant the de- 
struction oj utilities, It may have any one of three forms. 
When utilities are destroyed by a person who consumption 
derives from them the satisfaction that they deflned - 
were intended to afford, we have an act of final consump' 



14 THE CONSUMPTION OF WEALTH 

tion. When, on the o|her hand, commodities are used as 
tools or raw materials in the manufacture of finished 
products, productive consumption occurs; for, although 
the utility of such goods is destroyed, it reappears in the 
value of the completed product. Finally, if utilities are 
destroyed without affording satisfaction to any consumer 
or aiding in the production of other goods, we have an 
example of waste. 

§ 12. Although there is no assignable limit to the in- 
crease and diversification of human desires, any particular 
Human wa nt is satiable. If a person consumes at any 

wants are . . . 

satiable. given time successive units or portions of a 
commodity, he finds that the later units give less pleasure 
or satisfaction than the first. A small quantity of bread 
may appease the pangs of severe hunger, an additional 
amount may meet the needs of a healthy appetite, while 
a further supply will be eaten with indifference, if at all. 
If enough bread or enough of most other things is con- 
sumed, a point of satiety will finally be reached, at which 
an additional quantity will yield no satisfaction whatever, 
and may even cause pain. 

A consideration of these facts enables us to formulate 

the most important principle governing the consumption 

of wealth — the law of the variation of utility. 

Law of the 

variation of It is evident that the different units of the 
stock of any commodity do not have the same 
power of satisfying human wants, and that their utility 
constantly decreases as the supply is enlarged. A few units 
of an article necessary for the support of life will have a 
utility that is indefinitely great ; while additional units, use- 
ful as they may be, will satisfy wants of steadily diminish- 



THE LAWS OF CONSUMPTION' 15 

ing intensity. Upon this law depend some of the most 
important theorems of the science of economics. 

We are now in a position to make a distinction between 
total and marginal utility. Until the point of satiety is 
reached, each unit of the stock has a certain Total and 
power of satisfying wants, which will probably utility, 
vary, however slightly, from the utility of each of the other 
units. One of the units must satisfy a want which is less 
intense than that met by any of the others, and this may 
be called the marginal unit; while its utility may be 
called the marginal utility of the entire stock. Marginal 
utility ■, therefore, is defined as the utility of the last, 1 or least 
important, unit of the supply of a commodity; other things 
being equal, the greater the supply, the lower the marginal 
utility will fall On the other hand, total utility is the aggre- 
gate want-satisfying power of all the units of the entire stock. 

Little reflection is needed to show that our estimate of 
the relative importance of commodities for our use depends 
upon the marginal, and not upon the total utility. The 
A farmer who has harvested 1000 bushels of o?a°good Ce 
Indian corn consumes a part of the crop for f^ma/ma? 1 
food, reserves a portion as seed for the next year, utilit y- 
feeds a considerable amount to cattle or poultry, and sends 
the remainder to a distillery, where it is converted into 
whiskey. Assuming that he is not inordinately fond of 
strong drink, it is probable that the least important portion 
of the entire crop is that which is destined for the distillery ; 

1 Last, that is, in point of importance. The most important use of salt 
may be its use on the table ; the next, its use in feeding cattle ; the last, 
its use in keeping weeds out of sidewalks. The utility of salt for this last 
purpose is its marginal utility. 



l6 THE CONSUMPTION OF WEALTH 

and so long as the annual crop is as large as iooo bushels, 
any single bushel is of no more importance to the farmer 
than the whiskey which can be distilled from it. If the 
crop of the next year is deficient, no corn may be sent to 
the distillery; and the marginal utility of the stock may 
rise to that of the cattle or poultry maintained by means 
of what is now the least important portion of it. If, on 
the other hand, an unprecedented harvest should yield a 
crop of 2000 bushels, the farmer might use some of the 
corn for fuel, — a thing that has repeatedly occurred in 
the West when there has been a glut in the corn market. 
In all cases it is the use made of the marginal unit that 
determines the importance of any unit of the supply. 

§ 13. From the law of the variation of utility and the 
proposition that the importance of a commodity depends on 
Tne its marginal utility, we can proceed to another 

order?/ important principle, — the law governing the 
consumption, economic order of consumption. In selecting 
goods for our consumption, we estimate first of all the mar- 
ginal utility of the various commodities between which we 
are to choose. The fact that bread or meat is necessary to 
support life, and therefore possesses infinite total utility, 
does not lead us to purchase an indefinite supply of such 
necessaries of existence. We compare the utility of the 
least important, or marginal, unit of meat or bread with 
the marginal utility of other commodities, and select the 
article which yields the highest marginal utility. For a 
hungry man who has nothing to eat, bread or meat will 
have a greater marginal utility than anything else; but a 
man whose bodily wants are well supplied will prefer to 
purchase fine clothes, or books, or articles of luxury. 



THE LAWS OF CONSUMPTION 1 \y 

*ftese things have a smaller total utility than the food 
which keeps him alive, but to a well-fed man they have 
greater marginal utility. 1 

But the marginal utility of commodities is not the only 
thing that a prospective purchaser will take into account. 
A diamond may have greater marginal utility Marginal 

. . , & . , , , utility and 

tor me than any other precious stone, but before cost, 
purchasing it I must consider carefully the cost. If my 
daily wages are but $2, I may never in my life buy a dia- 
mond, because its cost is so great that I would prefer some 
less expensive stone. Evidently a purchaser compares 
not only the marginal utility of one commodity with that 
of another, but he also compares their respective costs: 
in forming a decision, he will determine which article will 
yield him the greatest surplus of marginal utility above 
its cost. If, for instance, oranges and bananas are offered 
for sale at the same price, say twenty cents a dozen, a per- 
son who prefers bananas to oranges will certainly purchase 
bananas, since, the cost being the same, they will evidently 
yield him the greater surplus of utility. Having pur- 
chased a dozen bananas, however, and having thereby 
lowered their marginal utility, it is possible that, if he 
makes a second purchase immediately, half a dozen 
oranges may be selected. To vary the illustration, let us 

1 Early economists, who were not familiar with the distinction between 
total and marginal utility, were puzzled by the fact that, as Adam Smith 
put it, " The things which have the greatest value in use have frequently 
little or no value in exchange." Smith observed : " Nothing is more useful 
than water ; but it will purchase scarce anything. ... A diamond, on 
the contrary, has scarce any value in use, but a great quantity of goods 
may frequently be had in exchange for it." How would a modern econo« 
mist explain this apparent paradox ? 



1 8 THE CONSUMPTION OF WEALTH 

assume that a banana costs five cents while oranges are 
selling for a cent apiece. Under such conditions a slight 
preference for bananas, which implies that the marginal 
utility of this fruit is slightly greater, would not be enough 
to lead a purchaser to select bananas. Before he will buy 
the more expensive fruit his preference must be strong 
enough to overcome a difference of four cents in the cost ; 
and unless bananas have for him a very much greater 
marginal utility, he will derive the greater surplus of satis- 
faction over cost by purchasing oranges. The economic 
order of consumption, therefore, depends on the marginal 
utility and the cost o) commodities; and those articles will 
be selected which yield the greatest surplus of marginal 
utility above their cost. 1 

§ 14. Since considerations of this sort determine the 
choices which purchasers make in all markets, we may 
The law base upon the principles governing the eco- 
of demand. n0 mic order of consumption a general law of 
demand. By demand the economist means something 
more than simple desire; he means desire coupled with 
the ability to pay. Demand is said to be small when the 
amount of a commodity that the public will buy is small, 
and large when the quantity purchased happens to be 
large. At any given time it will vary according to the 
marginal utility of a commodity and the cost of obtaining 
it, i.e., the price at which it is offered. If the marginal 

1 Under modern conditions the purchaser makes all the estimates in 
terms of money. To him money represents general purchasing power, and 
any amount of money, as one dollar, represents a certain fractional part 
of his income. The purchaser knows what a dollar is worth to him, and 
he compares the marginal utility of any commodity with the marginal 
utility of the money required to purchase it. 



THE LAWS OF CONSUMPTION- 19 

utility is high, consumers will obtain a larger surplus oi 
satisfaction, and the demand will be large ; if the marginal 
utility declines, on account of changes in taste or fashion 
the demand inevitably falls. If the cost of a commodity 
is great, consumers will derive a smaller surplus of satis- 
faction from its use, and the demand will be light; if, 
however, the price is reduced, the surplus increases and 
the demand improves. Demand varies directly with the 
marginal utility of a commodity, and inversely with the 
price at which it is offered. 

It remains for us to consider certain peculiarities in the 
demand for different commodities. With some articles 
the demand is very sensitive to changes in Elasticity 
price, decreasing promptly when prices rise ofdemand - 
and quickly increasing as they fall. Such a demand is 
termed elastic, and has the effect of steadying the price 
of a commodity at times when the supply fluctuates. This 
is the case with most of the comforts and luxuries of life 
purchased by the middle classes of our people. If a 
shortage develops in the supply of such articles, a moder- 
ate rise in the price will reduce materially the demand and 
prevent a great disturbance of the market ; while a largely 
increased supply will be disposed of readily enough if 
prices are slightly reduced. But with the great staple 
articles consumed by the masses of the people, the demand 
is inelastic. Prices of wheat, cotton, sugar, and salt fluc- 
tuate very greatly whenever the supply is suddenly in- 
creased or decreased, since a slight reduction in price will 
not stimulate sales enough to carry a surplus out of the 
market, and a moderate increase will not reduce mate* 
rially the amount that the people demand. 



20 THE CONSUMPTION OF WEALTH 

Elasticity of demand implies that a commodity may be 
dispensed with, and brings it about that, when such a 
Elasticity misfortune as a commercial crisis reduces the 
furthe?^ purchasing power of the people, the demand 
considered. f or articles of this character will fall off. very 
rapidly. Almost no class of commodities can escape alto- 
gether the effects of a period of industrial depression, but 
it is always the less necessary articles, i.e., those for which 
the demand is elastic, which are first and most seriously 
affected. Elasticity of demand, therefore, produces sta- 
bility of prices when the supply fluctuates, and instability 
when the purchasing power of the people is reduced. 

For any brief period of time demand may be said to 
depend simply upon the marginal utility of a commodity 
changes in and the price at which it is offered, but over 
powwof^ longer periods this statement is not entirely 
consumers. adequate. From year to year changes may 
take place in the resources or purchasing power of the 
consumers, and such changes are a third factor in deter- 
mining demand. Obviously, an increase of resources 
reduces the importance of a dollar to the consumer and 
affects demand in the same manner as a reduction of 
price. It frequently happens, therefore, that the demand 
is greater in years of high prices than in years of low prices 
caused by industrial depression. From 1894 to 1896, for 
instance, before business had recovered from the panic 
of 1893, the average annual price of wheat in New York 
City ranged from sixty-one to seventy- eight cents, and the 
annual consumption of the country averaged 296,600,000 
bushels. After that, however, times began to improve, 
with the result that, although the price ranged from 



STATISTICS OF CONSUMPTION 



21 



seventy-nine to ninety-five cents, the annual consumption 
of wheat averaged 349,400,000 bushels from 1897 to 1899. 
We conclude, then, that it is only for short periods, within 
which the resources of the consumers remain virtually 
unchanged, that demand will depend solely upon the mar^ 
ginal utility of a commodity and upon its price. 

III. Statistics of Consumption 

§ 15. Some of the laws governing the consumption of 
wealth find interesting confirmation and illustration in 
statistics of family expenditures which have statistics of 
been gathered by various investigators. The consumption, 
most celebrated of these studies was made by a German 
statistician, Dr. Engel, and related to the consumption of 
the working classes of Saxony. Its results are shown in 
the following table: — 



Items of Expenditure 



Subsistence 

Clothing 

Lodging 

Firing and lighting .... 
Education, public worship, etc. 

Legal protection 

Care of health 

Comfort, mental and bodily 
recreation 

Total 



Percentage of the Expenditure of 
the Family of 



A man with 
an income of 
from $225 to 
$300 a year 



Per cent 
62.OI 
16.O 



I2.0 I 
5.0 J 
2.0 1 

,o| 

1.0 \ 

I 

I.O J 



}.95.0 



5.O 



100.0 



A man with 
an income of 
from $450 to 
$600 a year 



Per cent 

5S-oi 
18.0 ! 



12.0 



; 90.0 

i 
5.0 J 

3-5] 
2.0 I 
2.0 \ 10.0 

i 
2.5 j 



A man with 
an income of 
from $750 to 
$1000 a year 



Per cent 
50.OI 

18.0 ! . 

12.0 D 
5.0 j 

5.5] 

3.0 [15.0 

I 
3-5 J 

100.0 



22 



THE CONSUMPTION OF WEALTH 



From these figures it appears that, (i) as the income 
of a family increased, a smaller percentage was expended 
Engei's f° r fo°d; (2) with every increase of income, 

law - the proportionate expenditure for clothing 

remained approximately the same; (3) with all changes 
in income, the percentage spent for rent, fuel, and light 
remained invariably the same ; and (4) as fast as incomes 
increased, a larger proportion was devoted to education, 
recreation, and miscellaneous purposes. These conclu- 
sions are generally known as Engei's law. 

Subsequent investigations in the United States as well 
as Europe have shown the substantial accuracy of Engei's 
results. The Seventh Annual Report of the 
United States Commissioner of Labor supplies 
us with the following data : — ■ 



American 
data. 





Object of 


Income 


Income 
$300 and 


Income 
$500 and 


Income 
$700 and 


Income 
$900 and 


Income 

$1200 

and over 


Expenditure 


$200 


under 
$400 


under 

$600 


under 
$800 


under 

$1000 




Per cent 


Per cent 


Per cent 


Per cent 


Per cent 


Per cent 


Rent 


I5.48 


I4.98 


I5.I5 


I5.60 


I4.96 


I2.59 


Fuel 


7.07 


6.04 


5-63 


442 


4.OO 


2.57 


Lighting .... 


I.OI 


.98, 


•97 


.88 


•74 


•45 


Clothing .... 


12.82 


14.14 


15.27 


16.33 


16.84 


15.71 


Food 


49.64 


45-59 


43-84 


38.89 


34-34 


28.63 


All other purposes 


I3.98 


18.27 


19.14 


23.88 


29.12 


40.05 



From all of these figures it appears that about nine 
tenths of the income of very poor families is expended 
for the satisfaction of mere existence wants, 
and that about one half is devoted to the pur- 
chase of food. As incomes increase, a largei 
proportion can be expended in satisfying culture wants, 



Significance 
of these 
figures. 



STATISTICS OF CONSUMPTION 23 

or can be saved. It is clear that the desires for food 3 
clothing, and shelter are less expansive than the other 
needs that constantly claim an increasing proportion oi 
the larger incomes. Clearly, also, the desire for better 
clothes and shelter is more expansive than the desire for 
improved diet, since the former claims a fairly constant 
proportion of all incomes, while the latter is satisfied with 
a steadily diminishing percentage. In general, it is appar- 
ent that, as the means of a family increase, a larger surplus 
of utility can be secured by diversifying the objects of 
family consumption. 

§ 16. Besides illustrating the laws of the consumption 
of wealth, statistics of consumption furnish convenient 
data for testing economic prosperity. 1 As 
Dr. Engel suggested, the percentage of income economic 
expended for subsistence can be taken as an 
index of the material prosperity of a family, and we can 
consider a small relative outlay for food an indication 
of greater welfare. But in addition to this we can esti- 
mate the comparative well-being of different countries 
by the aid of statistics that show the per capita consump- 
tion of various commodities. 

The relative outlay for meat increases with the income 
of the average family, and this fact lends considerable 
interest to the statistics showing the per capita consumption 
consumption of this important article. For ofmeat - 
England and France the following data are available : — 

1 Dr. Engel " has advanced the theory that it might be possible by a 
careful study of a sufficient number of family budgets for a period of years 
to construct a sort of social signal service. His idea is that changes in tota 1 
expenditures and in expenditures for various items in a sufficient number of 
typical families would enable us to predict the coming of industrial storms* '' 



24 



THE CONSUMPTION OF WEALTH 



Per Capita Meat Consumption in Kilograms 
(Kilogram = 2.2 lb.) 



Years 


France 


England 


I8I2 

1840 

1862 

1868 

1882 . . 

1890 


17 
20 
26 

33 


IOO.5 
I24.5 



The figures show a considerable increase in the consump- 
tion of meat, which may be accepted as an indication of 
greater well-being during the last half of the nineteenth 
century. They reveal also a marked difference in the 
amounts of meat eaten in the two countries. This indi- 
cates in part a higher standard of living in England ; • but 
it is probable that, under conditions of equal well-being, 
the consumption of meat would be somewhat smaller in 
France than on the English side of the Channel. 

Of greater interest are the statistics of the consump- 
tion of various cereals in the leading countries of Europe, 
consumption smce tne g rams are much more important than 
of cereals. meat as articles of diet. At a comparatively 
recent date (1890) the showing was as follows: — 

Per Capita Grain Consumption in Kilograms 





Wheat 


Rye 


Barley 


Maize 


Oats 


England .... 


154 





82 


15 


I02 


France .... 


256 


46 


32 


25 


95 


Germany .... 


67 


138 


56 


5 


88 


Russia .... 


82 


242 


37 





117 



STATISTICS OF CONSUMPTION 25 

The most striking fact disclosed by this table is the 
large consumption of wheat in England and France and 
the enormous consumption of rye in Germany and Russia. 
This is due to the fact that the peasants and the town 
laborers of the latter countries cannot afford to buy white 
bread, and perforce subsist on rye. In the consumption 
of barley, maize, and oats the differences are compara- 
tively unimportant. Between England and France a 
marked difference appears in the amount of wheat and 
rye consumed, a difference which is probably explained 
by the larger consumption of meat in England. If statis- 
tics were to be prepared upon the same basis for the 
United States, they would show a generous consump- 
tion of wheat, a large consumption of maize, — which, it 
will be observed, is little used in Europe, — a considerable 
consumption of oats, and a small consumption of rye 
and barley. 

If a large use of rye bread indicates a lower plane of 
xnaterial welfare, this is still more the case with a large 
consumption of potatoes. For the countries consumption 
of chief interest the figures for 1890 stand as of P° tatoes - 
follows : — 

Per Capita Consumption of Potatoes in Kilograms 



Ireland . 
Germany . 



679 

500 



France 
England 



292 
93 



Thus the large consumption of potatoes in Ireland indi- 
cates, not prosperity, but poverty; and the same is true 
of the figures for Germany. With England and France 
something better than a potato diet is shown, the former 



26 



THE CONSUMPTION OF WEALTH 



country holding a considerably better position than the 
latter. In all particulars these statistics reenforce the 
conclusions drawn from those relating to the consump- 
tion of grain and meat. 

In modern times the use of sugar has been greatly 
extended, and this commodity is now an important article 
consumption m ^ e consumption of the masses of the people, 
of sugar. Since 1850 the estimated sugar production 
of the world has risen from 1,463,000 to 9,475,000 long 
tons, an increase that far exceeds the growth of popula- 
tion. But this larger consumption of sugar has been 
very unevenly distributed among the various countries 
that have participated in it. In France and Germany 
the price has been kept high by taxation, while a vicious 
system of export bounties brought it about that French 
and German beet sugar was sold in England for less than 
cost. Under such conditions no surprise will be caused 
by the following figures : — 

Per Capita Consumption of Sugar in Kilograms 





Annual Average 
1870-1874 


Annual Average 
1885-1889 


Great Britain and Ireland . 

United States 

France 

Germany 

Italy 


22.6 

I7.6 

7-8 

6. 7 
2.9 


32.6 

24.5 

IO.7 

7-8 

3-1 



In recent years (1 889-1 899) the English consumption has 
risen to 43 kilograms, the American to 32, the French to 
15, and the German to 13.7. Of course, even if there 



STATISTICS OF CONSUMPTION 2J 

had been no sugar taxes and export bounties in France 
and Germany, the English, with their higher standard 
of comfort, would probably have consumed more sugar 
than the French or Germans; but, as things have been, 
the difference in favor of England has been enormously 
accentuated. 

The increased consumption of meat and sugar in most 
of the countries included in our investigations leads one 
to the conclusion that there has been a material 

Conclusions. 

improvement in the diet of large numbers 
of people, even though all classes may not have partici- 
pated equally in the greater diffusion of comfort. 1 The 
same inference can be drawn from the fact that, in some 
countries, at least, the consumption of tea and coffee 
has advanced with considerable rapidity. In the United 
States this change has been very marked. Our consump- 
tion of tea per capita increased from about one half pound 
in 1830 to something over one pound in the year 1900, 
while the coffee consumed by our people rose from less 
than three pounds to nearly ten pounds during the same 
period. The greatest differences appear in the relative 
amounts of these two articles consumed by various coun- 
tries. Australia, Great Britain, and Canada use very 
large quantities of tea, and consume comparatively little 
coffee. At the opposite end of the scale, Germany, France, 
and Belgium use a large amount of coffee and veiy little 
tea; while the United States and Holland consume a 
moderate quantity of tea and a large amount of coffee. 
It would be possible to show similar peculiarities in the 

1 If it were possible to obtain statistics showing the increased consump. 
tion of fruits and vegetables, this conclusion would be strikingly reenforced. 



28 THE CONSUMPTION OF WEALTH 

consumption of liquors and tobacco; but limitations of 
space compel us to proceed to another division of our 
subject, ■ — the production of wealth. 

FOR SUPPLEMENTARY STUDY 

General: Hadley, Economics, 1-25; Marshall, Economics, 118- 
131, 158-198 ; Seager, Introduction to Economics, 63-80. 

Special: Mayo-Smith, Statistics and Economics, 16-54; Seventh 
Annual Report of the United States Commissioner of Labor. 



CHAPTER III 

THE PRODUCTION OF WEALTH 

I. A General Survey 

§ 17. Since man does not create matter, the production 
of wealth does not mean the creation of something that 
was previously non-existent. The most that p roduc ti n 
human powers are able to do is to create defined - 
utilities; and production means, therefore, changing the 
forms or relations of matter so that it becomes better 
fitted to satisfy human wants. Wood or iron can be con- 
verted into houses or machines ; seeds can be placed in the 
ground where natural forces act upon them and stimulate 
the growth of plant life ; Dakota wheat can be transported 
to Liverpool, acquiring increased utility by the change 
of place. In these, and all other cases, production means 
the creation 0} utilities. 

§ 18. In the development of the arts of production 
five historical stages can be distinguished. In the most 
primitive stage wealth is obtained by hunting 
and fishing, with the aid of the simplest weapons economic 
and implements. The second is the stage of 
pastoral industry, in which men domesticate various 
animals, and depend chiefly upon their herds for food 
and clothing. A third stage is reached when men learn 
to raise plants as well as to rear animals. Pastoral peoples 
are, of necessity, nomads, since they are compelled to 

29 



30 THE PRODUCTION OF WEALTH 

move about from place to place in search for the best 

pastures for their flocks; but when agriculture becomes 

the principal industry, men settle permanently upon the 

land which they have improved, and nomadic existence 

comes to an end. 

The fourth stage is marked by the development of 

manufactures and commerce. Handicrafts, which pre- 

The viously have been merely subsidiary to agri- 

handicrafts , \ J . ; . J . 

stage. culture, are now greatly improved, and occupy 

a larger number of workers. Division of labor gradually 
arises and much more capital is employed, although 
production is carried on mostly by hand, aided only by 
the motive power furnished by animals, wind, and water. 
The products of the hand trades find an ever widening 
market, and commerce is prosecuted on a much larger 
scale than in the pastoral or agricultural stages. Money 
comes into more general use, as the indispensable tool 
of trade; and large cities now arise as centers of manu- 
facturing or commercial industry. In antiquity the most 
flourishing states of Greece and Italy reached this stage 
of development, and in the seventeenth and eighteenth 
centuries of the Christian era the leading countries of 
Europe had attained a similar position. 

Finally, since 1760, the most advanced countries of 
the western world have reached the industrial stage of 
The development. England led the way for the 

industrial . . . . . . j 

stage. other nations, and in the course of sixty years 

her industries were so greatly transformed that the changes 
which occurred have been called the Industrial Revolu- 
tion. The invention of improved appliances for spinning 
yarn and weaving cloth literally revolutionized first the 



A GENERAL SURVEY 



31 



cotton and later the other textile industries. The improve- 
ment of the steam engine, through the labors of James 
Watt and others, supplied a practical method of pumping 
water out of mines and hoisting coal from the shafts ; and 
thus the production of coal was greatly increased. With 
the abundance of fuel provided, the iron industry was 
stimulated into new life, and soon the invention of the 
blast furnace and other appliances completely transformed 
conditions there. English manufactures began to advance 
by leaps and bounds, and by 181 5 England had estab- 
lished that industrial supremacy which is only now begin- 
ning to pass from her hands. After 1790, when the new 
cotton machinery was successfully installed in the United 
States, the new appliances were gradually introduced 
into other lands, and by 1850 the change from hand to 
power manufacture was substantially complete in most 
of the great staple industries. Meanwhile the steam 
engine had been revolutionizing methods of transporta- 
tion on land and water, and the electric telegraph was 
coming into use. Commerce had been enormously in- 
creased by the cheapening of products and the improved 
means of communication; banking facilities had been 
widely extended; small stores and factories had been 
replaced or supplemented by larger industrial enterprises, 
and the business man of the middle of the nineteenth 
century had been placed in a new economic world which 
differed from that in which his grandfather had worked 
far more than his grandfather's world differed from that 
of the best days of the Roman Empire. It is to the study 
of the industrial stage, in which we now live, that the greater 
part of this book will be devoted. 



32 THE PRODUCTION OF WEALTH 

II. The Factors of Production 

§ 19. The production of wealth requires the coopera- 
tion of three factors, — nature, man, and capital. Of 
The three these, nature and man are, from the econo- 
f actors. mist's point of view, the original factors with 

which the science starts; while capital is a secondary 
or derived factor, resulting from the action of the other 
two, but a necessary auxiliary if production is to be at 
all copious. It will now be desirable to study each of 
these factors in some detail. 

§ 20. Nature assists man in production by furnishing 
him with various materials upon which he may exert his 
labor, and with physical and chemical forces 
which may be applied to useful ends. The 
windmill, water wheel, steam engine, and electric motor 
are some of the most conspicuous devices for utilizing 
natural forces in production ; but the cooperation of nature 
is secured, also, in the ordinary operations of agriculture 
and stockraising. 

§ 21. The United States has been, upon the whole, 
exceptionally favored in the natural conditions in which 
„ ^ , its economic life has developed. Its vast area 

Natural r 

conditions — 2,970,000 square miles, exclusive of Alaska 
American and outlying possessions — not only furnishes 
subsistence for a large population, but supplies 
widely differing conditions of soil and climate that enable 
the country to raise a large variety of agricultural prod- 
ucts. 1 American farms now include 478,451,000 acres 

1 The arid regions, which extend from about the one hundredth meridian 
to within two hundred miles of the Pacific coast, are the only unfavorable 
section of the United States. Their extent is large — from one third to 



THE FACTORS OF PRODUCTION 



33 



of improved land, 1 and as much more that is unimproved. 
From them are produced enormous crops of cereals 2 and 
nearly sixty per cent of the world's supply of cotton, 3 
besides an abundance of fruit and vegetables, as well as 
hay, tobacco, cattle, and dairy products. "Both food 
supplies," the census tells us, "and agricultural materials 
for manufacture are cheaper, more abundant, and more 
varied in the United States than in any other manufac- 
turing country." Tea, coffee, sugar, and wool are almost 
the only important vegetable or animal products for which 
we are obliged to depend wholly or largely upon external 
sources of supply. 

In respect of mineral resources the country is equally 
fortunate, producing in abundance almost everything 
required by manufacturing industries. Soft Mineral 
coal, upon which modern manufactures depend, resources - 
is found in many states, and is readily transported to all 

two fifths of the whole area of the country ; but a portion can, by means 
of irrigation, be made available for agricultural purposes, a part can be 
used for pasture, a part for forests; while, of course, the Rocky Mountains 
are very rich in mineral treasures. 

1 The improved farm lands equal 648,000 square miles, or the entire 
area of France, Germany, Austria, and Italy. 

2 In 191 1 the quantity of cereals produced and exported was as follows : — 





Produced 


Exported 


Corn 

Wheat 

Oats 

Rye 

Barley ....... 


2,886,200,000 bu. 

635,100,000 bu. 

922,200,000 bu. 

33,100,000 bu. 

160,240,000 bu. 


65,600,000 bu. 

69,300,000 bu. 

2,000,000 bu. 


9,399,000 bu. 



3 In 1910 the world's supply of cotton was 19,992,000 bales of 500 
pounds each. Of this the United States produced 11,608,000 bales. 



34 THE PRODUCTION OF WEALTH 

industrial centers ; 1 while a large supply of anthracite 
is procured from Pennsylvania. Iron ore is produced 
in enormous quantities, our output far exceeding that 
of any other country. 2 For industrial purposes, iron 
is the most precious of the metals, so that, in possessing 
the world's largest available supplies of coal and iron, 
the position of the United States is unique. Since the 
development of electrical industries in recent years, copper 
has taken rank among the most important metals; and 
in respect of this product our country is more fortunate 
than all others, producing in 191 1 some 548,000 tons 
out of a total world supply of 979,000 tons. Nor is there 
a lack of the less important minerals, with the single ex- 
ception of tin. Finally we should note that ever since 
the Californian discoveries in 1849, tne United States 
has been one of the great gold-producing countries of the 
world; while since 1870 the opening of silver mines in 
Nevada and elsewhere has given it a prominent position 
as a producer of the white metal. Only Australia and 
South Africa now rival this country in the production of 

1 In 1911 the world's coal production was as follows: — 

United States 496,221,000 tons. 

Great Britain 304,518,000 tons. 

Germany 258,223,000 tons. 

Other countries .... 241,038,000 tons. 
Total 1,300,000,000 tons. 

2 In 1909 the world's production of iron ore was : — 

United States 51,155,000 tons. 

Germany 25,504,000 tons. 

Great Britain 14,804,000 tons. 

France 11,890,000 tons. 

Other countries .... 21,786,000 tons. 
Total 125,139,000 tons. 



THE FACTORS OF PRODUCTION 35 

gold; and Mexico, in the mining of silver; while in the 
output of the two metals, the United States stands pre- 
eminent. 1 So far, then, as the mineral resources of the 
world are now known, it would appear that nature has 
dealt with no other land so bountifully as with our own. 
Besides the many excellent harbors which facilitate 
commercial intercourse with foreign lands and between 
the seacoast states, the United States pos- 

Waterways. 

sesses important inland waterways. The 
Hudson, the Delaware, and the James rivers have long 
been highways of commerce; but far more significant 
is the part which the Mississippi and its tributaries have 
played in the development of the central states. These 
rivers furnish many thousand miles of navigable waters, 
so that the introduction of the steamboat after 181 5 brought 
almost all parts of the Mississippi Valley into communica- 
tion with each other. Most important of all to-day are 
the Great Lakes which, with the canals that connect them 
at various points, now furnish an unbroken highway 
one thousand miles long, and carry a freight traffic equal 
to two fifths of all the tonnage transported by the railways 
of the country. With excellent harbors, with 18,000 
miles of navigable rivers, and with the largest lake system 
in the world, our industries have not lacked natural aids 
to the cheap assembling of raw materials ' and the ready 
shipment of completed products. 

§ 22. Through his own labor, man becomes the second 
factor in production; without it he "would necessarily 

1 In 1910 the world's gold output was 21,996,000 fine ounces, of which 
the United States produced 4,657,000; while the silver output was 
222,879,000 ounces, of which this country supplied 57,137,000. 



36 THE PRODUCTION OF WEALTH 

perish from the face of the earth even if all soils were 
fertile and all climates temperate." Labor, therefore, is 
an imperious necessity, but furthermore is, and 
always has been, a needful discipline and 
the means through which men have learned most of the 
virtues that have enabled them to advance from barbarism 
to civilization. Although sometimes distinctly pleasure- 
able, as the work of the scholar or the artist, and to some 
extent attractive in most of its forms, labor involves both 
bodily fatigue and the sacrifice of leisure that could be 
used for other purposes. For this reason it is probably 
true that most men need to be spurred on to their daily 
toil by the knowledge that, if they will not work, they 
shall not eat. . 

However great its educational influence may be, labor 

is not an end in itself; rather must it be considered 

a means to the end of a plentiful production 

Labor not an £ commo dities. Therefore we cannot approve 

end in itself. r r 

of attempts to make work for men to do by 
resisting the introduction of labor-saving machinery or 
by lavish expenditure on the part of the rich. 1 With 
the resources now at its disposal, society is unable to pro- 
duce all the things desired by its members. An improved 
machine or process sets free a certain portion of the labor 
force which can be employed in satisfying needs that 
formerly went unsupplied; while lavish expenditure 

1 A wealthy Frenchman, it is said, used to break his wine glass after 
finishing his repast, with the remark, " The world must live." Any one who 
approves of such methods of benefiting the poor might ask himself how 
much good would be done if the rich would only make a practice of break- 
ing tableware and destroying the rest of their household belongings. 



THE FACTORS OF PRODUCTION 37 

exhausts productive power that might have ministered 
to some reasonable want. Even if the production of 
wealth should ever be so great as to satisfy all rational 
needs, it would still be desirable to employ improved 
methods and appliances, since these things would insure 
greater leisure to cultivate higher faculties or to enjoy 
the wealth produced. 

§ 23. In the individual laborer efficiency depends upon 
a variety of factors which deserve a moment's attention. 
Original endowments of strength and vigor Efficie ncy 
vary greatly from one group of laborers to oflabor - 
another, men of some races surpassing others by fifty or 
one hundred per cent in mere muscular strength and 
physical endurance. Acquired skill and knowledge are 
other important factors, since in apparent capacity for 
improvement workmen differ as widely as in their original 
bodily endowments. Not ( every common laborer is able 
to develop the dexterity and the power of sustained, intelli- 
gent action required of a skilled mechanic in charge of 
an expensive and delicate machine. A third condition 
upon which efficiency depends is the enjoyment of good 
food and comfortable shelter; underfed laborers lack 
bodily vigor, and crowded, unsanitary tenements enfeeble 
the workmen and cause disease. Then the mental and 
moral qualifications of the laborer constitute a fourth 
factor, since intelligent and conscientious workmen require 
less superintendence, can be intrusted with work for 
which others are unsuited, and prove most effective ancl 
least wasteful. Finally the social esteem in which labor 
is held and the legal and political position of the laborer 
are factors of the utmost importance. When labor is 



$8 THE PRODUCTION OF WEALTH 

considered honorable, and wide opportunities are open to 
the man who renders the most effective service, laborers 
will display energy and ambition that will vastly increase 
the value of their work. In this particular the contrast 
between the United States and other countries is most 
marked; even recent immigrants, who can expect little 
change in their own position, show themselves eager to 
toil to the utmost in order that their children may enjoy 
opportunities denied to themselves. 

Efficiency remaining constant, the labor power of a 
country with a given population will depend upon the pro- 
The portion of the people who are engaged in use- 

proportion f u i pursuits. The statistics usually presented 

of laborers r • i i 

in useful in discussions of this subject give the number 
"engaged in gainful occupations," to use the 
words of our federal census. As shown in our open- 
ing chapter, slightly less than two fifths of our total popu- 
lation is so employed; and, upon this basis, our labor 
force consists of 29,285,000 persons. But these data 
necessarily omit the multitude of women, and even children, 
engaged in useful labor within their homes ; and, therefore, 
do not give an adequate idea of the true labor force of 
the country. For many purposes the figures may suffice, 
but they do not represent our entire labor force, as the 
term is here used. 

Finally, if efficiency and the proportion of useful 

workers remain the same, the labor force of a country 

will vary directly with the number of its inhabit- 

Population. . . 

ants. The growth of population is determined 
by two factors — the natural rate of increase and the 
gain of numbers through immigration. 



THE FACTORS OF PRODUCTION 39 

§ 24. The natural increase of population depends 
upon the proportion which births bear to deaths. In 
a community of 10,000 persons, 300 births The growth 
or deaths a year will give a birth or death of population. 
rate of 30 per thousand. If both the birth and the death 
rates remain at 30, population will be stationary; if, 
however, the normal birth rate is 35 and the death rate 
25, the annual increase will be 10 per thousand, or one 
per cent. From 187 1 to 1890 the average birth rates 
of the principal countries of Europe varied from 44 in 
Hungary to 24.6 in France; while death rates ranged 
from 33.7 for Hungary to 16.9 for Norway. Generally, 
the higher birth rates were accompanied by high death 
rates, so that they did not imply, necessarily, an extremely 
rapid increase of population. Thus Hungary had a birth 
rate of 44, and Norway a rate of 30.7 ; but the Hungarian 
death rate was 33.7, while the Norwegian was only 16.9; 
so that the latter country showed a net increase of 13.8, 
and the former an 'increase of only 10.3. In most of the 
countries of Europe population has, for a century or more, 
shown a steady increase ; but France, with a birth rate 
of 24.6 and a death rate of 22.8, has remained almost 
stationary in recent years. For the United States the 
somewhat conjectural estimates of the census indicate 
a birth rate of 35.1 and a death rate of 17.4, a net increase 
of 17.7. 

In the causes that influence the movement of popula- 
tion we come to a topic that has played an important 
part in economic discussion ever since 1798, T he theory 
when Thomas Robert Malthus, an English °fMaithus. 
clergyman, published his celebrated " Essay on the Prin- 



40 THE PRODUCTION OF WEALTH 

ciple of Population." In the form which his theory 
assumed in the later editions of this book, Malthus taught 
that, if unrestrained by anything except the mere physio- 
logical limits, population would increase in a geometrical 
ratio, doubling in periods of about twenty-five years. He 
contended, furthermore, that, at the best, the food supply 
can only be increased in an arithmetical ratio; so that, 
if the natural rate of the increase of population be repre- 
sented by the series 2, 4, 8, 16, 32, etc., the growth of the 
food supply would be not greater than is represented by 
the series 2, 3, 4, 5, 6. From these facts he argued that 
population tends continually to outstrip the available 
means of subsistence, and is kept down to the necessary 
limits by a series of restraints, such as war, famine, pesti- 
lence, ordinary diseases, vice, misery, and prudential 
checks. The conclusion which Malthus finally reached 
was that the prudential restraints, by which he meant 
the moral considerations that should lead a man to refrain 
from marrying before he is able to support a family, should 
be encouraged, in order that famine, vice, and disease 
need not be called into operation. 

Into the criticism or defense of Malthusianism we 
have not the time to enter, but the following considera- 
0ur tions concerning the movement of population 

conclusions. must claim our attention. Without doubt 
the physiological possibilities of the growth of numbers 
are very great, since, as has happened in the United 
States, population has, by natural increase, repeat- 
edly doubled in periods of twenty-five years. On the 
other hand, numbers must be restricted to the limits 
imposed by the necessity of procuring subsistence; and, 



THE FACTORS OF PRODUCTION 41 

if population is imprudently multiplied beyond this point, 
then famine or disease must reduce numbers, as happens 
continually among uncivilized races. Among civilized 
peoples, however, a proper regard for the future may lead 
men to postpone marriage until its responsibilities can 
be undertaken prudently; and this moral restraint may, 
as Malthus urged it should, adjust numbers to the resources 
of the community. 

The economic force which gives strength to this moral 
restraint is the desire to maintain one's standard of living. 
Each class of people in any society is accus- The standard 
tomed to enjoy a greater or less quantity of ofhvin s- 
the comforts and luxuries of life. This quantity forms 
the standard of living for any particular class, and prudent 
people will not marry until they have the prospect of 
incomes sufficient to support themselves and their children 
in the degree of comfort that they have been accustomed 
to enjoy. The standard is not an absolutely fixed quan- 
tity; but, on the contrary, can be raised or lowered. 
Educational influences that arouse new wants tend to 
elevate the standard; while a series of discouragements 
and misfortunes may lead a family to accept a lower one. 
In proportion as people are prudent enough to insist upon 
maintaining their accustomed scale of living, the popula- 
tion will be adjusted readily enough to the limits imposed 
by subsistence. Upon the other hand any classes of 
persons who disregard the plain dictates of prudence 
may expect to encounter some of the harsher restraints 
upon population, and have only themselves to blame 
for the suffering which their recklessness occasions. 

§ 25. Immigration, the second influence affecting the 



42 THE PRODUCTION OF WEALTH 

growth of population, has been a factor of the greatest 
importance in the United States. Migrations of men 
take place in all countries; but in Europe, 
since the great discoveries of the fifteenth and 
sixteenth centuries, emigrants to the newly discovered 
lands have usually exceeded the immigrants from all sources 
whatever. Immigration into the United States was com- 
paratively small from 1790 to 1820; but then it began 
to increase, and by 1840 had assumed large proportions, 
which it has maintained ever since. In 1850 there were 
2,244,602 persons of foreign birth in this country, and they 
formed 9.7 per cent of the total population ; by 1910 the 
number had grown to 13,515,800, and the percentage 
of foreign-born inhabitants had risen to 14.7. In addi- 
tion to this, there were, in the latter year, no less than 
18,897,000 native white persons who were of foreign 
parentage. 

The common view concerning the economic effects 
of immigration upon the United States is fairly represented 
Effects of by the following extract from a well-known 
InthfuSted work of reference: "It has supplied the labor 
states. f orce w hich was necessary to bring the soil 

under cultivation. It has enabled us to take up vast 
stretches of territory. It has built railroads, dug canals, 
made highways, cut down forests, — in short, turned the 
wilderness into cultivated land. It is safe to say that 
without this immigration the growth of the country would 
have been very much slower, and that we should only 
now be where we were twenty years ago." But there is 
reason for thinking that such a view of the matter over- 
looks certain very important considerations. 



THE FACTORS OF PRODUCTION 



43 



The fact is that, prior to the time when immigration 
became large, the population of the country increased 
at a rate that was even more rapid than that 
shown after the arrival of large numbers of 
immigrants. This is proved beyond question by the 
following statistics : — 



Some data. 



Date of Census 


Population 


Per Cent 
of Increase 


Number of 
Inhabitants 
per Sq. Mile 


1910 ..... 

1900 

1890 

1880 

1870 

i860 

1850 

1840 

1830 

1820 

1810 

1800 

I790 


91,972,266 
75,994,575 
62,947,714 
50^55,783 
38,558,371 
31,443,321 
23,191,876 
17,069,453 
12,866,020 

9,638,453 
7,239,88i 
5,308,483 
3,929,214 


21.0 
20.7 

25-5 
30.1 
22.6 
35-6 
35-9 
32.7 
33-5 
33-i 
36.4 
35-i 


30.9 
25.6 
21.2 
17-3 
13-3 
10.8 

7-9 
8.4 
6-3 
4.8 

3-7 
6.6 
4.9 



It will be seen that, in the decades ending in 1800 and 
18 10, the natural increase of the native inhabitants, in 
the absence of any considerable immigration, The rapid 
caused a growth of population amounting Srare^ eof 
to 35 and 36 per cent; while in the decades ? n op f ^ n 
ending in 1820 and 1830, when immigration tim es. 
was still small, the rate of increase was ^ per cent. Prior 
to 1820, therefore, the population, when it was dependent 
solely upon the natural increase of numbers, grew as 
rapidly as at any subsequent period. This was due to 



44 THE PRODUCTION OF WEALTH 

exceptional circumstances, chiefly to the fact that the 
United States was expanding over a vast area of fertile 
land ; so that an increase of numbers meant not so much 
an increase of mouths to be fed as an addition to the labor 
that could be employed in cultivating the soil. Under 
such conditions, which made it possible for each new 
family to take up a farm, marriage occurred at an early 
age, families were large, and nothing checked the growth 
of population except the physiological limitations upon 
its increase. 

The growth of numbers and the gradual disappearance 

of free land would have changed the situation in time, 

even if no new factor had intervened. As 

This was 

checked by population became more dense, it would not 
have been so easy to raise families of six, eight, 
or ten children; and the rate of natural increase must 
inevitably have declined. There are indications that 
this point was just being reached when immigration 
assumed such large proportions after 1840. In any case 
the inflow of a vast army of foreign laborers with lower 
standards of living brought to an end the easy conditions 
of life which had made possible the unprecedented natural 
increase of numbers from 1790 to 1830. This it did in 
two ways. In the first place, precisely as the natural 
increase of population would have done ultimately, the 
vast numbers of immigrants hastened the disappearance 
of free land — at first in the older states, but finally even 
in the far West. In the next place, having lower standards 
of living, the immigrants could drive the native-born 
inhabitants out of the ruder employments by their willing- 
ness at first to accept lower wages. As President Hadlej 



THE FACTORS OF PRODUCTION 45 

of Yale University has put it, "The Irishman in 1830 
forced the American up; the Italian and the Canadian 
have forced the Irishman up." Although this process 
drove the native-born into the higher occupations, it 
increased very greatly the expense of educating a family 
of children to the callings followed by their parents, and 
rapidly checked the natural increase of the native popula- 
tion. In this view of the case, therefore, immigration 
has not added to our total population so much as it has 
given us foreign-born in the place of native-born inhabit- 
ants. It may be too much to say that our population 
would have been exactly as large if immigration had never 
advanced beyond the proportions reached in 1830, but 
it is very probable that the net result has been to change 
the composition rather than to raise the aggregate number 
of our people. 

§ 26. We have now come to the third factor of produc- 
tion, capital, which is necessary in all except the most 
primitive kinds of industry. Indeed, the 

(3) Capital. 

hands of man, unaided, would hardly be able 
to do more than gather wild fruits and nuts, or procure 
a few other things that nature yields to the labor of mere 
appropriation. Most goods cannot be obtained by the 
direct application of human labor, and must be secured 
by an indirect process of approach. If men will first 
fashion fish nets or hunting weapons, they can then obtain 
fish or game which otherwise it would be impossible to 
procure ; if they will first devote some labor to the manu- 
facture of a plow and harrow, they can place seeds in the 
ground under such conditions that a bountiful harvest 
will be secured; or if they will first construct a water 



46 THE PRODUCTION OF WEALTH 

wheel or a steam engine, they may harness water or steam 
in the production of results that no amount of unaided 
human effort could possibly attain. In all such cases 
men adopt an indirect or roundabout method of satisfy- 
ing their wants ; they first produce tools or machines, and 
then utilize these instruments in the production of wealth. 
Indirect methods of production are far more effective 
than direct, because they enable man to utilize all the 
materials and forces which nature supplies. 

Indirect rr 

methods of Such materials as the useful metals, for instance, 

production. , , . . . 

could never have been wrought into a form 
adapted to human use without various appliances of 
indirect production. Even a material like wood cannot 
be utilized to any purpose without the employment of 
suitable implements. Heat and moisture cannot insure 
a good crop unless the soil has been prepared by proper 
tools; and air, water, steam, and electricity are powerless 
to assist industry unless they are brought into operation 
by the right sort of machines. Indirect processes, there- 
fore, enable man to secure the fullest cooperation of nature, 
and vastly increase the production of wealth. 

Capital, then, may be defined as all the intermediate 
products which man creates for the purpose of employ- 
capitai ing them in the production of finished com- 

modities, or, more briefly, as the produced 
instruments of production. The various objects included 
in our definition are sometimes described as producer's 
goods, and are contrasted with products ready for final 
consumption, which are termed consumer's goods. Some 
difficult or controverted points connected with the defini- 
tion are for the moment postponed. 



THE FACTORS OF PRODUCTION 47 

§ 27. It will be helpful at this time to enumerate the 
concrete forms which capital may assume. Tn e concrete 

* • 1 t r 11 forms of 

A convenient classification runs as follows : — capital. 

(1) Productive improvements upon land, such as fences 
or drains. 

(2) Buildings, such as barns, factories, or stores, devoted 
to productive industry. 

(3) Means of transportation, such as roads, canals, or 
railways. 

(4) Raw materials, as wool, iron, cotton, or silk, which 
are consumed in the act of production, but reappear 
in the product. 

(5) Auxiliary materials, as coal, lubricating oils, or bleach- 
ing materials, which do not reappear in the product. 

(6) Tools and machines. 

(7) Domesticated animals used in production. Our 
domestic animals have been so much improved by 
breeding that they are distinctly a product of human 
industry. 

(8) Money, weights, and measures are important aids 
to modern industry, which is based on exchange. 

(9) Commercial stocks of finished products. These 
commodities, while still in the hands of merchants, 
are strictly to be considered as materials to which 
place or time utilities are being added. 

(10) Books, instruments, and all other appliances used 
by persons who render personal services. The 
instruments of the surgeon or the books and scientific 
apparatus of the student are examples. 

In returning now to the difficult questions raised by 
our definition, something should be said concerning two 



48 THE PRODUCTION OF WEALTH 

things which have been excluded from the concrete 
forms of capital. Land was omitted because it is not a 
Land is product of human industry devoted to produc- 

not capital. t j ve p Ur p ses. It is a necessary instrument 
of production, of course; but it is supplied by nature, 
not by human effort, and has been treated adequately in 
our discussion of nature as a factor of production. It 
must be separated from capital unless we are willing to 
confuse the parts which man and nature play in produc- 
tive industry. To this view of the case the objection is 
sometimes raised that much land has been so improved 
by human effort that it is no longer a mere gift of nature. 
But our definition classifies the improvements as capital, 
and places the land itself in a separate category. Again 
it is objected that such improvements as fertilizers -and 
drains become in time inextricably merged with the land ; 
but this is a reason for exercising care in applying our 
definition, and not for refusing to discriminate between 
two things that are usually so clearly distinguishable as 
land and capital. 

From our list of the forms of capital, man's acquired 

faculties also are excluded, contrary to the usage of some 

economists. We must admit that acquired skill 

Acquired 

faculties or technical knowledge is a product of human 
effort, and that it may be employed in the 
production of wealth. But all this is satisfactorily 
accounted for in our discussion of labor as a factor of 
production, and there is no need of introducing it in our 
treatment of capital. No practical difficulty arises if one 
wishes to follow such a course, but it seems more con- 
venient to take account of acquired skill and technical 



THE FACTORS OF PRODUCTION 49 

knowledge when we consider the part that labor plays in 
production. 

One further word should be said concerning commercial 
stocks of finished products, which were included among 
the concrete forms of capital. Many economists have 
counted as capital all food and clothing, the 

/1 1 1 ? , The case of 

subsistence of laborers, on the ground that commercial 

stocks 

these things enable men to produce more goods. 
In our view of the matter, however, food and clothing 
are capital only so long as they are a part of the stocks 
of goods to which middlemen are adding place and time 
utilities. When they reach the laborer, they become con- 
sumer's goods, and the use which he makes of them is 
considered an act of final, and not productive, consumption. 
The opposite view converts the laborer into a mere 
machine, and makes production, instead of consump- 
tion, the end of industrial processes. 

§ 28. We are now ready to consider certain other methods 
of classifying the various forms of capital. A distinction 
is usually drawn between -fixed capital and 
circulating capital. The former consists of methods of 
such objects as buildings, tools, and machines, 
which can be used in repeated processes of production; 
the latter comprises fuel or raw materials, which are con- 
sumed in a single process. More important is a second 
distinction which is made between free and specialized 
capital. Free capital exists in such a condition that it 
may be applied to any one of a number of industries; 
while specialized capital is invested in such a manner 
that it assumes a fixed form, and cannot be withdrawn 
without partial or total loss. Coal, lumber, iron, and 



50 THE PRODUCTION OF WEALTH 

bricks are relatively free capital, because they might be 

invested in many different industries ; while blast furnaces, 

steel rails, and carpet looms are so specialized that they 

can be used for only a single purpose. 

§ 29. It remains for us to study the process by which 

capital is formed and accumulated. Obviously the first 

The step is the collection of materials and fashion- 

formation . . 

of capital. mg of the implements needed m the process 

of indirect production ; all capital, therefore, is the result 

of labor expended in creating it. This labor may be 

expended by the person who accumulates the capital, 

or by other persons whom he hires to work for him. Thus 

a farmer produces capital when he builds a fence or digs 

a drain, and a manufacturer produces it when he hires 

masons and carpenters to erect a factory building. If 

the person who desires to build and equip a factory or 

railroad has not all the funds required for the purpose, 

he may borrow from private capitalists or from banks 

the sums needed to complete the undertaking. Bankers 

make a business of receiving larger or smaller sums of 

money which depositors do not happen to need for use, 

and of lending such sums to persons who wish to establish 

or extend business enterprises. A business corporation 

secures its capital from the numerous investors who 

purchase shares of its stock. Usually when capital is 

supplied by banks or raised by a corporation through the 

sale of its stock, it is said that money is invested in 

the new undertaking ; but, in reality, the money is merely 

the means by which the lender or investor transfers to the 

manager of the enterprise control over the labor power 

needed for its development. In all cases, from that of 



THE FACTORS OF PRODUCTION' 51 

the farmer who digs a drain to that of the corporation 
which issues its securities, the process ultimately involved 
is setting in motion the labor required in the production 
of capital. 

But this is not the whole of the matter. The labor 
that constructs a barn or builds a factory might have 
been used in producing consumption goods 
which would immediately satisfy some human sacrificed 

mr . iir i to the future. 

want. The barn and the factory, upon the 
other hand, are able, of themselves, to satisfy no want 
when their construction is completed. They are useful 
only for the production of goods that will be available 
at some future time, and it may be years before they can 
be expected to return to the owner the value represented 
by his investment. The production of capital, therefore, 
always involves the sacrifice of the present enjoyments 
that the command over a certain amount of labor could 
give, for future satisfactions which the investor expects 
to derive from his outlay; it always presupposes a prefer- 
ence for future goods rather than for present enjoyments, 
and it involves a sacrifice of the present to the future. 

This fact is the basis for the customary statement that 
capital is the result of abstinence as well as of production. 
Socialists are pleased to ridicule such a state- 

1 . . Abstinence. 

ment, and to inquire how much abstinence 
is represented by the last million that a Rothschild adds 
to his accumulations. "The ascetic millionaires of 
Europe!" wrote Ferdinand Lassalle. "Like Indian peni- 
tents or pillar saints they stand on one leg, each on his 
column, with straining arms and pendulous body and 
pallid looks, holding a plate toward the people to collect 



52 THE PRODUCTION OF WEALTH 

the wages of their Abstinence. In their midst, towering 
up above all his fellows, as head penitent and ascetic 
the Baron Rothschild!" 

But, as here used, the word " abstinence " signifies 
nothing more than abstaining from present enjoyments 
The meaning m order to secure some future end. It does 

of abstinence. JJjJ imply ^ a rich man hag tQ ^ aDstem i_ 

ously in order to accumulate large amounts of capital; 
it does mean that he refrains from erecting a new palace 
or purchasing a new yacht or indulging in some present 
enjoyment, whenever he invests a part of his income in a 
productive enterprise. The shallowness of Lassalle's 
witticism becomes apparent, in any case, when we reflect 
that millionaires do not supply all the capital that is needed 
to keep industry in motion, and that a considerable part 
comes from people of the middle class and even from 
those in still humbler circumstances. For thousands 
of persons who accumulate capital, saving does mean 
plain or even abstemious living; still, this is not what 
our word " abstinence " primarily implies. 

A nation's stock of productive capital can be main- 
tained only by constant investment; raw materials are 
capital quickly exhausted, tools and machines wear 

™ coMtant out m tne course of time, factories and rail- 
investment. roac i s demand continual repairs. A con- 
siderable part of the gross product of industry needs to 
be devoted to the replacement of capital that has dis- 
appeared during the year ; and if this replacement should 
be neglected even for a twelvemonth, the productivity of 
labor would be enormously reduced. It is evident, there- 
fore, that capital must be regarded not as a fixed quantum 



THE FACTORS OF PRODUCTION 53 

of wealth ; but rather as a fund continually changing and 
maintained only by the constant accession of new pro- 
ducer's goods. 

Since saving requires abstinence, or the sacrifice of the 
present to the future, it is obvious that the amount of 
capital that is brought into existence will vary Tfl e 

. rr 1 i inducements 

according to the inducements offered to those to saving, 
who give the preference to future goods. Security of 
invested capital is the first and most important induce- 
ment to saving, while insecurity always proves the most 
effective deterrent. A fair rate of interest on investments 
is a second stimulus, although it cannot be shown that 
an exceedingly low rate would stop all accumulation. A 
third inducement is the desire to provide for one's old 
age or the comfort and integrity of one's family. Others, 
doubtless, can be enumerated; but the principal forces 
that favor the growth of capital are those which have been 
mentioned. 

The nineteenth century witnessed a marked develop- 
ment of savings institutions and other facilities for the 
investment of capital. Between 1820 and Facilities for 

* 1 r i • • • saving and 

191 1 tne number of depositors m the savings investment, 
banks of the United States rose from 8635 to 9,597,185; 
and their savings, increasing in similar proportion, aggre- 
gated $4,212,583,000 in the latter year. These institu- 
tions are particularly important since they accept deposits 
of small sums which could not otherwise find profitable 
investment. The growth of trust companies during the 
last generation has afforded another agency for the safe in- 
vestment of funds, the deposits of these institutions hav- 
ing increased from $85,025,000 in 1875 to $3,295,000,000 



54 THE PRODUCTION OF WEALTH 

in 1 91 1. Life insurance companies have stimulated 
greatly the growth of capital, since the annual premiums 
which they collect from millions of policy holders represent 
money which in many cases would have been spent and 
not converted into capital. Of course the companies are 
obliged to disburse a considerable part of their incomes 
for death losses and running expenses ; but they accumu- 
late large amounts of capital, nevertheless, for the purpose 
of meeting future liabilities. At the present time the 
gross assets of the leading life insurance companies of 
the country exceed $3,875,877,000. 

FOR SUPPLEMENTARY STUDY 

General: Hadley, Economics, 26-63; Marshall, Economics, 213- 
318 ; Nicholson, Political Economy, I, 32-47, 66-103, 175-216 ; 
Taussig, Principles of Economics, Bk. I. 

The History of Productive Industry : Bullock, Introduction to 
Economics, n-77; Cheyney, Industrial History of England, 
199-239; Seager, Introduction to Economics, 1-45. 

Nature as a Factor of Production : Adams, Commercial Geography, 
1-138; Mayo-Smith, Statistics and Economics, 111-154; 
Shaler, Nature and Man in the United States, 208-283. 

Man as a Factor of Production : Malthus, Essay on the Principle 
of Population ; Mayo-Smith, Statistics and Sociology, 65-92, 
128-153, 314-340, Statistics and Economics, 55-110. 

Capital as a Factor of Production : Hamilton, Saving and Savings 
Institutions; Mayo-Smith, Statistics and Economics, 155-192. 



CHAPTER IV 

THE ORGANIZATION OF PRODUCTIVE INDUSTRY 
I. The Organization of the Factors of Production 

§ 30. In our introductory chapter it was explained 
that the production of wealth is a social process, because 
it involves the constant cooperation of men 

Production 

who are bound together in complex economic asocial 
relations. The full extent and significance of 
this cooperation will be better appreciated after a brief 
survey of the methods by which the three factors of pro- 
duction are organized for industrial purposes. 

§ 31. The division of occupations is one form of asso- 
ciated effort. This occurs in a family when the men 
attend to the outdoor work and the women Division of 
to the care of the house. Or, upon a far wider occu P ations - 
scale, it takes place within a community when persons 
begin to devote themselves exclusively to a single trade, 
such as that of the smith, the shoemaker, or the 
carpenter. 

§ 32. A still more complex form of cooperative produc- 
tion is seen in what is called technically the division of 
labor. By this is meant the division of the Division 
process of producing a commodity into a num- of labor - 
ber of different parts, by which each laborer is given but 
one or two simple operations to perform. In this manner, 

55 



56 ORGANIZATION OF PRODUCTIVE INDUSTRY 

for instance, the manufacture of a shoe has been sub- 
divided into 122 operations requiring the services of 113 
different laborers. So far, indeed, has the division of 
labor been carried in a modern factory that every reader 
is able to supply many illustrations of this minute sub- 
division of the work of production. 

The advantages of the division of labor were recognized 
by Xenophon, who wrote, about 362 B.C.: "In small 
its cities the man who makes beds may make 

advantages. d oorSj plows, tables, and perhaps houses; 
he is glad if, even so, he can find customers enough to 
provide a living; and it is plainly impossible that a man 
practising many crafts should be good at them all. But 
in great cities, because there is a large demand for each. 
article, a single craft is enough for a living, or sometimes, 
indeed, no more than a single branch of a craft. We find 
one man making men's boots only ; and another, women's 
only; one man lives by cutting out garments, another by 
fitting together the pieces. The smaller the work, the 
greater the skill in the craftsman." Better known, how- 
ever, is Adam Smith's discussion of this subject, which 
has become classical. Smith showed that "the division of 
labor, by reducing every man's business to some one 
simple operation, . . . necessarily increases very much the 
dexterity of the workman." Then he pointed out that, 
since "a man commonly saunters a little in turning his 
hand from one sort of employment to another," a con- 
siderable amount of time is saved when a person confines 
himself to a single kind of labor. And, finally, he observed 
that the division of labor reduces production to a series 
of comparatively simple processes which can easily be 



ORGANIZATION OF FACTORS OF PRODUCTION 57 

studied, and the more readily improved by inventions. 
The list of advantages has been elaborated by subsequent 
writers, but the root of the matter may be found in Smith's 
discussion — and, indeed, in that of Xenophon. 

We should not, however, overlook the fact that certain 
disadvantages attend the division of labor. The work- 
man who is confined to a single process often Disadvan- 
finds his duties exceedingly monotonous; and, JivSonof 6 
unless he cultivates other interests, his facul- labor - 
ties become narrowed, while his intelligence declines. 
Again, men who have devoted their lives to a few routine 
forms of labor do not easily find other work if a distur- 
bance in industry throws them out of their accustomed 
employments. Finally, the division of labor has led to 
tne employment of women and children in many kinds 
of manufacturing industry, since little muscular strength 
is needed to operate some kinds of machinery. The 
textile industries in particular offer a large field for the 
utilization of such labor; and in 1900 our cotton, woolen, 
and silk mills employed, for every 45 men, no less than 55 
women and children. Yet, when all is said, the division 
of labor has been an indispensable condition for the devel- 
opment of modern industry; and a wise policy will seek 
to retain its advantages while remedying the incidental 
evils that may result from it. Opportunities for education 
and recreation will counteract the monotony occasioned 
by confinement to a single operation, while the employ- 
ment of women and children may be restricted in all 
cases where the health of the workers or the welfare of 
the family demands such action. 

§ 33. Underlying the division of labor is another coop- 



58 ORGANIZATION OF PRODUCTIVE INDUSTRY 

erative process, — the exchange of products. Without 

the opportunity to exchange their wares, the shoemaker, 

carpenter, smith, and farmer could not devote 

Exchange. x . 

themselves exclusively to their respective occu- 
pations. By means of an organized system of markets 
merchants provide a vent for the products of all indus- 
tries, and supply producers with whatever goods they 
may desire to obtain in exchange for their own commodi- 
ties. In fact the extent to which labor can be subdivided 
depends upon the quantity of the particular product 
which the market can absorb; obviously if there is a 
demand for only ioo pairs of shoes each year, it will not 
pay to adopt methods that enable the producers to turn 
out iooo pairs. This was perceived by Xenophon when 
he said: "But in great cities, because there is a large 
demand for each article, a single craft is enough for a 
living, or sometimes, indeed, no more than a single branch 
of a craft." And, in the " Wealth of Nations," Adam 
Smith enunciated the principle that the division of labor 
is " limited by the extent of the market." 

§ 34. A fourth form of association in industry is found in 
the cooperation of the three factors of production ; for it is 

necessary that the persons who control the sup- 

Cooperation 

of the factors plies of land, capital, and labor should combine 
in the establishment of business undertakings. 
Sometimes it happens that one man may own both land 
and capital, and do all the work that is required. This 
is the simplest possible way to secure the cooperation of 
the three factors, and is a common method in American 
agriculture, where so many farmers cultivate their own 
land with their own labor and capital.. 



ORGANIZATION OF FACTORS OF PRODUCTION 59 

But whenever different classes of persons control the 
supplies of land, labor, and capital, a more complex form 
of organization is necessary. The function The 
of securing the cooperation of landlords, ent,,e P reneur - 
laborers, and capitalists has fallen to a distinct class of 
persons, known as employers or undertakers 1 or entre- 
preneurs. Under modern conditions this position has 
become exceedingly important; entrepreneurs are con- 
stantly seeking favorable opportunities for establishing 
business enterprises, and upon the good judgment which 
they show in locating and organizing an industry its 
subsequent success in large measure depends. Very 
often the entrepreneur contributes a part of the capital 
invested in a new undertaking, and he may even labor 
with his own hands; but when he does either of these 
things, he is acting as a capitalist or laborer ; his function 
as entrepreneur is wholly distinct from any additional 
functions he may choose to assume as landlord, capitalist, 
or laborer. 

Entrepreneurs may secure the cooperation < of land, 
labor, and capital by any one of the following 

methods : — business 

(1) The single entrepreneur system, in which 

an employer, contributing all of the land and capital, 
or hiring a part, and collecting the requisite number 
of laborers, establishes and conducts a business upon 
his individual responsibility. 

1 Undertaker is the older English word for a person who establishes 
and conducts a business undertaking. Thus Adam Smith speaks of an 
undertaker employing " manufacturers." Since the word is now commonly 
applied to a single line of business, the equivalent French word, entrepreneur. 
has come into use. 



60 ORGANIZATION OF PRODUCTIVE INDUSTRY 

(2) Next comes the ordinary business partnership. In 
this, two or more men unite in supplying the capital 
and assuming the risk of management. This form 
of undertaking is advantageous when the business 
requires more capital than any one partner could 
supply, or when the cares of management need to be 
divided. The partners agree to share profits or 
losses in certain proportions, and are jointly and 
severally liable to their creditors for all the debts of 
the firm to the full extent of their fortunes. 

(3) A third form of undertaking is the business corpora- 
tion. This is now of such exceedingly great impor- 
tance that it will require detailed treatment in the 
second part of our chapter. 

(4) Cooperative production is the next form of under- 
taking. In this, a number of laborers combine to 
establish an enterprise and to conduct it upon their 
own responsibility, dispensing with the services of 
the entrepreneur. The strength and weakness of 
such enterprises will be considered in a subsequent 
chapter. 

(5) Another sort of undertaking is the management of 
business by a government. The post office is usually 
conducted in this way, and water works or gas and 
electric plants may be managed in this manner. 
This, again, brings up a subject that will be dis- 
cussed elsewhere. 

Ho Business Corporations 

§ 35. For our discussion a corporation may be defined 
as a number of persons who are empowered by law to act 



BUSINESS CORPORATION'S 6 1 

as an individual for certain purposes denned by a charter. 
Such a body corporate is given the power of providing for 
a succession of new members upon the death 

' it Growth of 

or retirement of the old ; and thus is authorized business 
to maintain a continued existence for a period 
of years, or, more commonly, in perpetuity. A church, 
a university, or a charitable institution can be most con- 
veniently organized in this way; and until the nineteenth 
century, such eleemosynary organizations, together with 
a considerable number of chartered municipalities, formed 
the vast majority of all the corporations in existence. The 
nineteenth century, however, witnessed an enormous in- 
crease of corporations formed for business purposes ; and, 
at the present day, all large enterprises, as a mere matter 
of course, assume corporate form. In the United States 
the census of 1910 showed that nearly eighty per cent of 
the product of our manufacturing industries came from 
incorporated companies. When it is remembered that 
all our railways are owned and operated by corporations, 
and that mining industries are usually conducted in the 
same manner, it will be evident that a very large share of 
the business of the country has passed into corporate 
control. 

§ 36. The charter of a corporation authorizes the mem- 
bers to act as a single person through such officers or 
other agents as they shall appoint to represent them. 
They may acquire or sell property, may con- The powers of 
duct manufacturing or commercial enterprises, a cor P° ratlon - 
and may sue and be sued. The powers of a corporation 
are fixed by its charter ; and beyond the limits thus defined, 
it cannot lawfully proceed. Any action that exceeds the 



62 ORGANIZATION OF PRODUCTIVE INDUSTRY 

powers conferred by the charter would be pronounced 
by the courts ultra vires ; i.e., beyond the powers of the 
corporation; and in extreme cases such action might 
lead to a forfeiture of the charter. . Under the lax laws of 
some of our states, however, corporations may secure 
power to do almost anything under the light of the sun; 
so that in such cases the doctrine of ultra vires has little 
more than academic interest. 1 Until shortly before the 
middle of the nineteenth century it was necessary to apply 
to a state legislature for a special charter for every cor- 
porate enterprise that was established. Sometimes char- 
ters were granted only to members of the party in power, 
or could be procured only by bribing members of the legis- 
lature ; so that at last it became desirable to enact general 
laws under which any body of persons could, by comply- 
ing with certain reasonable conditions, secure the privilege 
of incorporation. At the present time some of our states 
allow corporations to be formed only under general acts 
of this character, while everywhere the tendency is to 
restrict the granting of special charters. 

§ 37. A business corporation has a capital stock which 
is divided into shares, usually of $100 each. When a com- 
pany is formed, the laws of most states allow these shares 
to be issued to the original subscribers upon any con- 

1 Here are some of the provisions of the charter of a lumber company 
organized in New Jersey. The company is given power " to acquire 
and improve timber, farming, grazing, mineral, and other lands"; to 
" manufacture lumber, iron, steel, manganese, coke, copper, and other 
materials" ; to construct and operate railways, canals, " and any other 
means of transportation " / and " to engage in any other manufacturing, 
mining, constructive, or transportation business of any kind or character 
whatsoever? 



BUSINESS CORPORATION'S 63 

ditions that the promoters of the enterprise establish; 
although stricter regulations are imposed by federal laws 
upon national banks, and by some states upon 

1 m A Common and 

public- service companies. Thus a capital stock preferred 
of $1,000,000 may represent the payment of 
$1,000,000 in cash, or property taken at a fair valua- 
tion; or it may represent a payment of $1000 by the 
original subscribers, in which case $999,000 of the 
capitalization is usually described as "water." Stock 
may be common or preferred; the latter being entitled 
to a certain annual rate of dividend, say six per cent, 
before anything can be paid to the holders of the com- 
mon stock. 

Many corporations raise a considerable part of their 
capital by issuing obligations known as bonds. Legally 
a corporation bond is a debt of the company corporation 
that issues it, and calls for the annual payment bonds - 
of a fixed rate of interest as well as for the repayment of 
the principal at the expiration of a certain term of years. 
In a majority of cases the payment of both interest and 
principal is secured by executing a mortgage upon the 
property of the corporation for the benefit of the bond- 
holders, and securities thus issued are termed mortgage 
bonds. In such cases the failure to pay either interest or 
principal gives the bondholders the right to seize and sell 
the mortgaged property in order to satisfy their claims; 
but in practice it is not always feasible to carry out a fore- 
closure sale, so that some sort of compromise is often 
effected. From the economic point of view the bonded 
debt of many corporations is not to be considered as a 
true debt, but rather as a permanent investment of capital 



64 ORGANIZATION OF PRODUCTIVE INDUSTRY 

by the bondholders. A railroad costing $2,000,000 to con- 
struct, and earning $120,000 net income a year, would be 
able to pay six per cent dividends upon $2,000,000 of 
stock. If, now, the promoters issue stock only to the 
amount of $1,000,000, and raise the rest of the capital by 
selling $1,000,000 of four per cent bonds, the company 
will be able to pay the $40,000 annual interest on the bonds 
and then have $80,000 available for dividends on the stock. 
By raising one half of their capital by means of a bond 
issue, the stockholders in this company can receive an 
eight per cent dividend in place of the six per cent that 
would have been secured if all the capital had been raised 
by means of stock. The railroads of the United States 
in 1910 had outstanding $8,113,657,000 of stock and 
$10,303,474,000 of bonds and other obligations. While 
some of this indebtedness will ultimately be paid, the 
greater part will never be retired ; and it must be consid- 
ered as a permanent part of the capital which the country 
has invested in its railway system. 

§ 38. In almost all of the states the stockholders of a 
corporation are not liable for the debts of the enterprise. 1 
Limited ^ n case °f insolvency the stockholders may lose, 

liability. £ course? a n that they have invested when the 
property of the corporation is seized in order to satisfy the 
demands of its creditors; but their liability extends no 
farther, so that their position is vastly more favorable than 
that of the members of a business partnership. The 

1 Some exceptions are made. A number of states make stockholders 
liable for wages due to employees ; or when part of the capital has been 
refunded to stockholders ; or for any sums remaining unpaid on the shares 
owned. 



BUSINESS CORPORATIONS 65 

English Parliament and the legislatures of many of the 
American states were slow to adopt this policy of limiting 
the liability of stockholders; but, during the last half of 
the nineteenth century, such a course was practically 
forced upon them. For under modern conditions vast 
sums of capital are needed for the prosecution of large 
enterprises, and the funds could not be obtained without 
the grant of a limited liability. Many men may be glad 
to risk small or moderate sums in a new and untried en- 
terprise, when no one would invest a penny if such action 
obliged him to jeopardize his entire fortune. More- 
over, the limitation was defensible upon grounds of equity, 
because the average stockholder in a large corporation has 
little influence upon the conduct of its afiairs, and fre- 
quently knows little about them ; in fact the person who 
extends credit to a company is usually in a better position 
to judge of its solvency. Such considerations do not apply 
to a small corporation in which a few persons, perhaps 
members of one family, own all of the stock; but in 
raising the capital needed for building railroads, equip- 
ping giant factories, and operating huge steamships, 
limitation of the stockholders' liability is both just and 
expedient. 

§ 39. Besides making it possible to raise the large 
capitals demanded by the conditions of modern industry, 
the business corporation has the advantage of 
rendering the life of an enterprise independent of corporate 

.... organization. 

of such contingencies as the death of any or all 
of its members. With a partnership, the affairs of the 
firm have to be readjusted every time that one of the part- 
ners dies; and there are comparatively few such enter- 



66 ORGANIZATION OF PRODUCTIVE INDUSTRY 

prises that survive the death of the last of the original 
members. The existence of an incorporated company, 
however, is in no way involved in the death of a stockholder 
even though its prosperity may be affected by the loss of 
one who had been its ablest leader. Since such a concern 
as a railroad ought always to be managed with an eye to 
the distant future, it is highly desirable to have it con- 
trolled by a company that can count upon a perpetual 
existence. 

It has proved advantageous to have the ownership of 
our largest industrial enterprises divided up into the 
The stock thousands of small shares represented by the 
exchanges. stocks. Not only does this arrangement afford 
good opportunities for small investments, if the companies 
are honestly conducted, but it makes it possible to deter- 
mine at any moment the value of a man's holdings, whether 
large or small. For the securities of the leading corpo- 
rations are bought and sold in the public stock exchanges 
by a large number of professional dealers who make it 
their business to study these securities and to ascertain 
their value. By looking at the quotations which the 
morning paper brings him in its stock market columns, 
an investor can tell at a glance the money value of his 
holdings, and can either increase or dispose of his shares 
by merely telephoning to his broker. Speculation in the 
stock market has its undesirable features, of course, and 
is responsible for a great many evils which are too well 
known to require discussion; but the utility of the stock 
market in facilitating the valuation and transfer of cor- 
poration securities is so great that business could not be 
conducted without it. 



BUSWESS CORPORATIONS 



6 7 



§ 40. Some knowledge of the elements of corporation 
accounting is absolutely indispensable for the student of 
modern industry, and the subject can be best corporation 
approached by a study of what are known as accountin e- 
the income account and the balance sheet. The income 
account presents a statement of the earnings and expendi- 
tures of a company for a certain period, such as a quarter, 
or a year; and is sufficiently illustrated by the following 
statement of a railroad which, in 1903, operated some 400 
miles of line : — 



Earnings 




Expenses 




Passenger 


$771,905 


Maintenance of track 




Freight . 


1,229,761 


and structures 


$264,091 


Mail and express 


100,798 


Maintenance of cars 




Miscellaneous 


191,842 


and locomotives . 


177,368 






Operating trains 


850,543 






Taxes 


67,548 






Miscellaneous 


79,290 



$2,294,306 



$1,438,840 



Summary : Net earnings, $855,466. Paid for rent of leased lines, 
$19,000; for interest on bonded debt, $540,052; on sinking fund, 
$33,000: for dividends, $261,728. Total payments from net earn- 
ings, $853,780 ; surplus for year, carried to profit and loss, $1686. 



A balance sheet is intended to give a complete state- 
ment of the resources and liabilities of a company on a 
given date, as upon December 31 of any year. The balance 
If honestly and accurately computed, it enables sheet * 
stockholders, investors, and creditors to judge of the sol- 
vency of the company. For the railroad to which we have 
already referred, the balance sheet for 1903 disclosed the 
following facts: — 



68 ORGANIZATION OF PRODUCTIVE INDUSTRY 



Liabilities 


Resources 


Common and 


pre- 


Cost of road and 


ferred stock 


. $9,257,000 


equipment . $18,679,549 


Funded debt . 


. 11,162,000 


Investments (stocks 


Accounts and 


bills 


of other roads) . 1,285,792 


payable 


732,218 


Accounts and bills 


Profit and loss 


756,102 


receivable . 438,545 
Materials and supplies 283,540 
Improvement fund 809,424 
Cash . . . 4io?47o 




$21,907,320 


$21,907,320 



of the 
liabilities. 



A number of these items require some explanation. It 

will be noted that the capital stock of the road is placed 

among its liabilities. This is done in order to 

Examination ° 

account for the money which the stockholders 
have invested in the property; against this 
stock and the bonded debt, the company has a railroad 
costing $18,679,549 and some other things, all of which 
appear among the resources. The third item in the lia- 
bilities requires little comment; it represents wages due 
to laborers, accounts due to dealers in supplies, and small 
loans secured from banks. The item " profit and loss" 
represents surpluses from the earnings of previous years 
which have been invested in the property instead of being 
paid out to stockholders in the form of dividends. 1 
Such surpluses represent an additional investment by the 
stockholders, and need to be charged up against the enter- 
prise, like the capital stock. All together the balance sheet 
shows that $20,419,000 raised by issuing stock and bonds, 

1 If the net result of the operations of the road up to date had been a 
deficit, the item " profit and loss " would appear among the assets, in order 
to balance the accoupte- 



BUSINESS CORPORATIONS 69 

$756,102 saved out of the profits of previous years, 1 and 
credits for $732,218 now due to various persons, have been 
invested in the property owned by the company. 

Against these liabilities what has the railroad to show? 
In the first place $18,679,549 has been expended in con- 
structing and equipping the road: while 

o -a rr o j Examination 

$1,285,000 has been invested in the stocks of of the 
other companies which it was desirable to con- 
trol in order to secure the traffic which they could supply 
at various junction points. 2 Then the company has on 
hand $283,540 of coal and other supplies and $410,470 
of cash, which account for a corresponding amount of 
the liabilities. Moreover, $438,545 of debts are due to 
the company from connecting lines and other concerns; 
while $809,424 of money, raised by a recent issue of bonds, 
is on deposit in a bank, awaiting the time not far distant 
when it will be needed to pay for improvements that are 
now under way. The sum of these resources, of course, 
exactly equals the liabilities; and this side of the balance 
sheet shows precisely what the company has done with 
the capital invested in it. 

§ 41. While the growth of corporations has been, upon 
the whole, eminently beneficial in its influence upon mod- 
ern industry, we should not overlook the dark speculative 
side of our picture. In nearly all countries, but P romotlon - 
most of all in the United States, lax laws and a low stand- 
ard of business morality have enabled serious evils to creep 

1 It will be remembered that the income account for 1903 showed that 
$1686 had been carried to profit and loss. • 

2 From these stocks, dividends of some $60,000 were secured, which, in 
the income account, are included in the miscellaneous earnings. 



70 ORGANIZATION OF PRODUCTIVE INDUSTRY 

into corporation management. Of these the most obvious has 
been the promotion of companies for purely speculative pur- 
poses. In times of great prosperity corporation promoters 1 
have too frequently duped the public into buying the shares 
of worthless companies, and have made large fortunes by 
floating numbers of enterprises that could have no reason- 
able prospect of success. This sort of thing began early 
in the seventeenth century with the Mississippi Company 
in France and the South Sea Company in England; and 
it has continued ever since, the closing years of the nine- 
teenth century and opening years of the twentieth wit- 
nessing the most unprecedented outbreak of speculative 
promoting in the history of the United States. This evil 
will not be entirely removed so long as the laws of New 
Jersey and some other states make it so easy to float cor- 
porations with a maximum capitalization and a minimum 
of substantial assets 2 ; but much can be done by the invest- 
ing public if it will only learn to discriminate between 
bubble companies and legitimate business enterprises. 
Much may be accomplished also by such an administra- 
tion of our present laws against obtaining money upon 
false representations as will make it unsafe for a promoter 
to withhold material facts or publish false statements con- 
cerning the assets and earning power of a projected 
company. 

A second class of evils is connected with the manage- 
ment of companies that are carrying on legitimate and 

1 Promoter is the word commonly applied to the man who conceives 
the plan and carries through the work of floating a company. 

2 In one well-authenticated case a company owning property worth less 
than $500,000 was floated with a capitalization of $8,000,000. 



BUSINESS CORPORATIONS 7 1 

profitable enterprises. A corporation is controlled by a 
board of directors elected at an annual meeting of the 
stockholders and intended to represent the irresponsible 
wishes of a majority of the men who own the mana g ement - 
property. As a matter of fact, when stock is owned 
by thousands of small holders who can adopt concerted 
action only with great difficulty, it has been comparatively 
easy for a few large capitalists to control the annual meet- 
ings. 1 Once in control, a board of directors has too often 
proceeded to manage the property for its own personal 
interest, and not for the benefit of all the stockholders. 
Directors of railroads have formed construction companies 
to build lines that have then been sold to their roads for 
four or five times the actual cost of constructing them. 
In this way many railroads have been deliberately wrecked 
by the burden of bonded indebtedness contracted in the 
purchase of worthless branches or of valuable lines bought 
at exorbitant prices. Many of these evils have been cor- 
rected, and railroad management is to-day on a distinctly 
higher plane than it was ten or twenty years ago; but 
our standards of business morality do not yet lead us to 
drive out of positions of trust men who have once abused 
their power as directors for ulterior personal ends. 

Then, also, corporations afford too great facilities for 
the separation of ownership and management. In the 
first place holders of bonds are creditors, not members; 

1 Shares are often bought with borrowed money just before the annual 
meeting, and sold immediately afterward. This is done, of course, in 
order to secure temporary control of the votes which the shares represent. 
Then, too, the directors are often divided into classes so that only one 
third will go out of office each year. This makes it more difficult for a 
majority of stockholders to oust a dishonest board of managers. 



72 ORGANIZATION OF PRODUCTIVE INDUSTRY 

and therefore have no voice in the management of the com- 
pany. A railroad with $1,000,000 of common stock and 
separation $1,000,000 of bonds is, so long as it remains 
of ownership so l V ent, absolutely in the control of the persons 
management. w ho supply only one half of the capital in- 
vested. 1 Moreover, one half of these stockholders can 
control the whole body ; so that ownership of $500,000 se- 
cures absolute power over $2,000,000 of capital. In recent 
years the art of obtaining control with a minimum of out- 
lay has been perfected by the use of a device known as the 
holding company, which is formed to acquire the securities 
of other corporations. In the case just described, ownership 
of $500,000 of capital carries control of a $2,000,000 
property; but by means of a holding company control 
can be secured still more cheaply. Manifestly, if a holding 
company with $500,000 of capital purchases half the stock 
of the first corporation, it will become the arbiter of its 
fortunes; and if, then, a few men acquire $250,000 of the 
stock of the holding company, they will be the masters 
of both concerns. In this way and in others, ambitious 
or designing men are able to wield a power that is wholly 
disproportionate to their investments in the corporations 
controlled. Such conditions are extremely unfortunate, 
since directors who neither own the property which they 
manage nor owe obedience to the men who are the real 
owners, wield an irresponsible power that encourages reck- 
lessness and affords abundant opportunities for dishonesty. 
In the future reform of our corporation laws, care should 

1 Some railroads have been built entirely out of the proceeds of bond 
issues, the common stock being wholly water. Here the roads are con* 
trolled by men who have invested practically nothing. 



BUSINESS CORPORATIONS 73 

be taken to check this tendency toward the separation of 
ownership and management; and the device known as 
the holding company should be placed beyond the pale of 
the law. 

FOR SUPPLEMENTARY STUDY 

General: Marshall, Economics, 319-356, 371-392; Nicholson, 
Political Economy, I, 104-121, 131-137. 

Division of Labor : Thirteenth Annual Report of the United States 
Commissioner of Labor, " Hand and Machine Labor." 

Business Corporations: Green, Corporation Finance; Johnson, 
American Railway Transportation, 69-77. 

Organization of American Industries : Twelfth Census of the United 
States, Reports on Agriculture and on Manufactures. The 
following references are suggested as topics for special reports 
or essays: Agricultural progress of fifty years (Rep't. Agric, 
I, pp. xvi-xxxvi) ; Localization of the principal crops* (Rep't. 
Agric, II, plates 1-19) ; Present condition of American jnanu- 
factures (Rep't. Mfgrs., I, pp. xlvii-lix) ; The leading manu- 
facturing industries (Rep't. Mfgrs., I, pp. cxliii-cliv) ; Power 
employed in ma7iufactures (Rep't. Mfgrs., I, pp. cccxv- 
cccxxxv) ; Localization of industries (Rep't. Mfgrs., I, pp. 
cxc-ccxiv) ; Studies of particular industries or of industries 
of one's own state (Rep't. Mfgrs.: for textiles, III, pp. 3-16; 
for clothing, III, pp. 296-301 ; for cotton ginning, III, pp. 336- 
340; for flour, III, pp. 369-371; for slaughtering and meat 
packing, III, pp. 412-421 ; for dairy industry, III, pp. 437-444; 
for leather, III, pp. 730-738; for iron and steel, IV, pp. 3-27; 
for agricultural implements, IV, pp. 358-364). 



CHAPTER V 

THE LAWS OF PRODUCTION: THE VARIATION OF PRO- 
DUCTIVE FORCES 

I. The Law of Diminishing Returns 

§ 42 „ In studying the consumption of wealth we saw 
that the most important principle governing that pro- 
cess was the law of the variation of utility; it is now 
time to consider an analogous principle that 

Variation of 1 . r , , , 

efficiency of governs the production of wealth, — the varia- 
tion of the efficiency of productive forces. It 
will appear that land, labor, and capital, when combined in 
the process of production, yield varying results according 
to the conditions under which they are applied ; and that 
the laws governing this variation are some of the most 
important theorems of our science. We shall discover,- 
furthermore, that there are three sets of conditions with 
which the efficiency of production varies; and that, cor- 
responding to them, there are three laws which govern 
the variation. 

§ 43. The proportions in which land, labor, and capital 
are combined are the first condition that affects the effi- 
Law of ciency of productive forces ; and the variations 

retons S f ing tnat result from changing the proportions of 
(a) From land, these three factors are governed by the law of 
diminishing returns. Upon a farm comprising twenty 

74 



THE LAW OF DIMINISHING RETURNS 



75 



acres of land the annual product will vary according to 
the amount of labor and capital employed in cultivating 
it. Obviously a small expenditure upon a twenty-acre 
tract will yield a meager crop, a larger outlay will give 
better results, and so on until a point is reached at which 
it is absolutely impossible to increase the plant life that 
can find light, room, and nourishment upon the farm. 
But no cultivator ever invests labor and capital upon any 
tract of land until it is absolutely impossible to increase 
the size of his crop. Even if he has an abundance of 
labor and capital to employ, he will find that, when a cer- 
tain point is reached, it will be more profitable to begin 
to cultivate another tract of land. This is because, after 
this point is passed, each dollar expended begins to yield 
a smaller return than if it had been invested elsewhere. 
This may be illustrated by the following table which applies 
to an assumed case. 





Amount of Labor 




Average Yield to 


Amount of Land 


and Capital 


Bushels of Corn 


Each Dollar of 


Cultivated 


used in Culti- 


Produced 


Labor and Capi- 




vating Crop 




tal Invested 


20 acres . . . 


$IOO 


200 


2.0 bushels 


20 acres . . . 


$200 


500 


2.5 bushels 


20 acres . . . 


$300 


900 


3.0 bushels 


20 acres . . „ 


$400 


IO40 


2.6 bushels 


20 acres . . . 


$500 


I IOO 


2.2 bushels 



According to the conditions here assumed $100, or even 
$200, is too small an investment to secure the best results 
from this twenty- acre tract ; and the efficiency of the pro- 
ductive process steadily increases as the investment rises 



76 THE LAWS OF PRODUCTION 

to $300, when an average return of three bushels of corn 
is secured for each dollar employed in hiring labor and 
Explanation capital. Beyond this point, however, the average 
ment o? 6 yield begins to decrease, so that the additional 
the law. labor and capital would be employed more 
efficiently if it were invested upon other land equally good, 
provided such land is obtainable. 1 Upon these conditions, 
which are recognized by every intelligent farmer, econo- 
mists base the law of diminishing returns, which may be 
stated as follows: An increase 0) the capital and labor 
applied in the cultivation of any tract of land will, after a 
certain point is reached, yield an increased aggregate but 
a smaller proportionate return. If this law were not true, 
agricultural produce would be raised upon a comparatively 
small amount of the most fertile soil, and men would never 
have taken the trouble to bring inferior lands into cultiva- 
tion. 

So far our illustration of the diminishing returns to 

labor and capital employed upon a given tract of land 

has been confined to agricultural industry, 

The law # ° J 7 

holds for aii but the law is equally true elsewhere. In 

industries. r . - 

manufactures it does not pay to invest more 
than a certain quantity of labor and capital upon a single 
acre of land, since a point is finally reached at which it is 
better to extend a factory over additional ground than to 
carry it farther up into the air. Although the practice 

1 By increasing the investment from $300 to $400 the product would 
be increased only by 140 bushels, so that the last $100 may be regarded 
as producing only 140 bushels. Obviously if, by investing the last 
$100 on a suitable amount of other land, a product of more than 140 
bushels could be obtained, the farmer would certainly make the invest- 
ment there. 



THE LAW OF DIMINISHING RETURNS 77 

varies in different industries, modern factory construction 
is inclined to favor low buildings rather than the four or 
five story structures that were so common a generation 
ago. In such a low building the walls do not need to be 
made so heavy, expense for elevators is saved, machinery 
can often be arranged more conveniently, and the fire 
risk is reduced. The law of diminishing returns, there- 
fore, applies to manufactures as well as agriculture. 

And the same is true of other industries. 1 Even the 
erection of office buildings in large cities is limited in this 
manner, although modern steel construction has 

1 ° Even for 

given us the familiar skyscraper. The tallest office 

, M ,. i-ii • buildings. 

building cannot be raised above a certain point 
except at a rapidly increasing expense for elevator service, 
and the provision for larger fight and air spaces dimin- 
ishes the proportion of land available for the building. 
When such structures are isolated, they pilfer light and 
air from adjoining landowners; but as any section of a 
city becomes filled with them, the limitations just men- 
tioned grow more apparent. 

It appears, therefore, that sooner or later a point of 
diminishing returns is reached in all investments of labor 
and capital made upon any given tract of land. 
We must recognize, however, that this law industries 18 
begins to operate much sooner in some indus- Frances!" 
tries than in others; so that great differences 
exist in the amount that can be invested before the returns 

1 Mining is most decidedly an industry of diminishing returns. As sur- 
face deposits are exhausted, it is necessary to drive shafts deep into the earth 
at a rapidly increasing expense. Ultimately, of course, a mine may be 
exhausted ; but this is not what is meant by diminishing returns. 



78 THE LAWS OF PRODUCTION' 

begin to diminish. In agriculture a farm of forty acres 
may permit an investment of $10,000 in fixed capital, 
and an annual outlay of $1500 in actual cultivation; while 
the same amount of land might be used for steel works 
that would represent a total investment of $10,000,000. 
With office buildings an investment of $8,000,000 per 
acre is possible in a city of very large size ; and it is prob- 
able that these figures mark the utmost present limit to 
the intensive utilization of land. Yet to farm and to 
office building the same law applies, and the only differ- 
ence is the extent of the investment that can be made 
before diminishing returns appear. 

§ 44. What is true of land is true, also, of labor and 
capital. With a given quantity of labor, say the services 
of one man, the efficiency of production will 
returns S from vary according to the amount of land and 
(c^capitaf 114 ca pital with which he works. A tract of one 
quarter of an acre, and an appropriate amount 
of capital, will probably be insufficient to utilize fully the 
services of even a single worker ; one acre will give better 
results, ten acres may do still better, and twenty acres 
will perhaps yield the largest return obtainable from the 
labor of one man. Beyond this point it will not pay to 
invest land and capital if the services of only a single 
worker are available; so that we find here diminishing 
returns to investments of land and capital with a given 
supply of labor. Similarly with capital, different amounts 
of land and labor may be employed. A given supply of 
buildings, tools, machines, and materials may be combined 
with little land or labor, and produce a small return; 
may be employed with an ample supply, and thus utilized 



THE LAW OF DIMINISHING RETURNS 79 

with the greatest efficiency; or may be spread out over 
too much land and operated by too many laborers to secure 
the best results. With a given amount of any one factor 
of production, increased investments of the other two 
factors will show an increasing product up to a certain 
point, and beyond that point, a diminishing return for 
each unit applied. 

§ 45. But while this law holds true of all three of the 
factors of production, its practical and theoretical con- 
sequences are not the same in the case of labor «. ._ 

t- Significance 

and capital as in that of land. Every man of the law 

with respect 

who conducts a farm, a factory, or a store to labor and 
will endeavor to combine the three factors capi a ' 
in such manner as to secure the largest returns with the 
smallest outlay. A certain minimum amount of each is 
necessary for the establishment of any sort of enterprise, 
but beyond that point an entrepreneur is free to select 
that factor which is cheapest and invest it in preference 
to the others. Thus some land, some capital, and some 
labor must be had in any factory; but if labor is cheap 
and capital is expensive (i.e., if the rate of interest is high), 
somewhat more labor will be employed and somewhat 
less machinery installed. Such an arrangement means 
that the machinery *is manned by enough workmen to 
give a large product for each dollar of capital invested, 
even though the labor would have produced more if 
employed upon more machines. 1 High rates of interest 

1 It will be observed that in this case we take a fixed amount of capital 
and consider the result of employing increasing amounts of labor upon it, 
just as, with land, we assumed a twenty-acre tract, and considered the 
result of employing increasing amounts of labor and capital upon it. 



80 THE LAWS OF PRODUCTION 

and low wages would make this the most profitable method 
of procedure. Upon the other hand, if wages are high 
and interest rates low, more machinery will be introduced 
and somewhat less labor employed. In this case the 
labor of each workman would be aided by enough machin- 
ery to make his product large, even though the machines 
might have produced more if additional laborers had 
been employed. To the extent here indicated, labor or 
capital is constantly being invested beyond the point of 
diminishing returns in order to secure the most profitable 
utilization of that factor which happens to be most expen- 
sive. Stated in another way, this means that there is a 
certain margin or zone within which that factor of pro- 
duction which is cheapest will tie used in preference to 
others. Under ordinary circumstances this margin is 
not large, and it is only within the limits here defined 
that any employer will utilize labor or capital beyond 
the point of diminishing returns. 

With land, however, the case is different. An employer 
can usually secure as much labor and capital as he needs 
significance to equip his enterprise without raising materi- 
witn 6 respect ally the price of these two factors of produc- 
toiand. t j orij b ecause our supplies of capital and labor 

constantly increase with the growth of wealth and numbers. 
But the supply of land does not increase as the popula- 
tion and industry of a community grow ; so that its price, 
i.e., the rent that it bears, tends steadily to rise on account 
of the increased demand for farms, house lots, and sites 
for factories. Sooner or later it happens that the best 
tracts of land are utilized as fully as possible without 
investing labor and capital beyond the point of dimin- 



THE LAW OF DIMINISHING RETURNS 8 J 

ishing returns, and then producers have no option but 
to use inferior tracts or to invest upon the old land more 
labor and capital than can be used to the best advantage. 
Both of these things are finally done; and, therefore, 
the utilization of land becomes more and more intensive 
and expensive. Thus the growth of population forces 
a community to use its land beyond the point of diminish- 
ing returns, while no such pressure exists in the case of 
labor and capital. 

With land, therefore, the law of diminishing returns 
has a peculiar significance. The earlier economists, 
who studied the law solely with reference 

. Conclusion 

to agricultural industry, were inclined to 
interpret it as meaning that the human race necessarily 
secures its food and other raw produce with increasing 
difficulty, as population advances. This, of course, 
would be the result of investing upon poorer lands, or 
upon the better soils beyond the point of diminishing 
returns, if nothing else entered into the problem. But, 
as a matter of fact, improved methods of cultivation, 
agricultural machinery, and the better organization of 
industry may enable the poorer soils — and the invest- 
ments made beyond the point of diminishing returns 
upon the superior soils — to yield as large a product for 
a given outlay as was secured under the earlier conditions. 
All depends upon whether the progress of agricultural 
methods keeps pace with the increased demand upon the 
land. Broadly speaking, it appears to have done so in 
the past; and at the present moment the applicatior, 
of modern science to agriculture seems to be opening 
a new era for that industry. What may happen in thf 



82 THE LAWS OF PRODUCTION 

remote future is wholly a matter for prophecy, concern- 
ing which speculation is unprofitable; for the present, 
and for any future that we need contemplate, there is no 
reason for thinking that the operation of the law of dimin- 
ishing returns will mean that the race will procure its 
subsistence with an increasing expenditure of labor and 
capital. 

II. The Law of Economy in Organization 

§ 46. The second condition that affects the efficiency 

of productive forces is the total amount of land, labor, 

and capital that is aggregated in a single busi- 

Vanationsm r 00 o o 

the size of a ness enterprise. Here we have to deal with 

business. . . . .. . 

the comparative advantages and disadvantages 
of large- and small-scale production. The variation in 
efficiency that accompanies changes in the size of a busi- 
ness is governed by the law of economy in organization. 
It will appear, however, that our present knowledge of 
the facts of modern industry is not sufficient to enable 
us to formulate this law with as much precision as was 
possible with the law of diminishing returns. 

§ 47. In manufacturing industry the new machinery 
that was introduced at the time of the Industrial Revolu- 
tion accelerated in a very marked degree the 

Growth of ■ . J & 

the factory growth of what is known as the factory system. 
Steam engines and other costly machines 
could not be used economically in the little workshops 
where production had previously been carried on, even 
if each small producer had been able to buy them. Ac- 
cordingly it became necessary to organize manufactur- 
ing industry in factories where expensive machinery and 



THE LAW OF ECONOMY IN ORGANIZATION 83 



large bodies of laborers could be brought together under 
skillful supervision; and, later, gigantic corporations 
entered some parts of the field, establishing the mammoth 
enterprises that are characteristic of our time. During 
the nineteenth century, therefore, there was a remark- 
able tendency toward the concentration of manufactures 
in large enterprises. 

Some statistics from the census of 1900 will show how 
greatly the size of manufacturing establish- statistics foi 
ments increased in certain industries in the m^nSac* 
United States during the last half of the nine- tures - 
teenth century : — 





Average 












Number of 


Average Capital 


Average Product 


Industries 


per Estab- 


per Establishment 


per Establishment 




lishment 












1850 


1900 


1850 


1900 


1850 


1900 


Iron and steel . . . 


53 


333 


#46,716 


#858,371 


#43.650 


#1.203,545 


Agricultural i m p 1 e - 














ments .... 


5 


65 


2,674 


220,571 


5.133 


I4L549 


Leather, tanned and 














finished .... 


4 


40 


3.406 


133.214 


6,500 


156,231 


Silk and silk goods . 


26 


135 


10,124 


167,872 


27,007 


222,063 


Paper and wood pulp 


15 


65 


16,390 


219.538 


22,996 


166,876 


Cotton goods . . . 


84 


287 


68,100 


442,882 


56,553 


321,517 


Woolen goods . . 


25 


67 


18,036 


120,180 


27,715 


"4.425 



This table requires little comment. So far as the aggregate 
masses of labor and capital invested in a single establish- 
ment are concerned, concentration is most marked in the 
iron and steel industry. If, however, the comparative 
changes since 1850 are considered, it appears that the 
percentage of increase in the size of the average estab 



8 4 



THE LAWS OF PRODUCTION' 



lishment has been most marked in the manufacture of 
agricultural implements. 

Other industries show this tendency toward large-scale 
production in different degrees. In transportation the 
other growth of vast railroad systems has been very 

industries. marked. 1 In wholesale and retail trade the 
tendency is less uniform, since small shops persist even 
by the side of the department store. Ten or twenty years 
ago it was often thought that agriculture was showing a 
perceptible tendency toward concentration, but experi- 
ence has demonstrated that such a view was incorrect. 2 
This industry, in fact, seems not to have been greatly 
affected by the forces that elsewhere have led to the aggre- 
gation of land, labor, and capital in larger masses. 

§ 48. Wherever an industry has become concentrated 
The econo- m larger establishments, the change has come 
SaieprJ arge " about for tne rea son that production could be 
carried on most economically in that manner. 



pro 
duction 



1 In 1902 the total mileage of American railways was 203,132 miles. 
Of this, 165,321 miles was controlled by nineteen great railway systems, 
of which the eight largest controlled about two thirds of all the mileage 
of the country, and handled more than that proportion of the total traffic* 

2 The census of 1900 shows that, since 1880, farms of less than fifty 
acres have increased at the expense of the larger farms : — 





Percentage of American Farms of Specified Areas 


Year 


1-19 Acres 


20-49 
Acres 


50-99 
Acres 


IOO-4g9 

Acres 


500 Acres 
and Over 


1880 
1890 
1900 
1910 


9.8 

9.1 

11.8 

13.2 


19-5 
19.8 
21.9 

22.2 


25-8 
24.6 
23.8 

22.6 


42.3 
44.O 

39-9 

39.2 


2.6 

2-5 
2.6 
2.8 



THE LAW OF ECONOMY IN ORGANIZATION 85 

The economies that are often secured by large-scale pro- 
duction may be classified as follows : — 

(1) Economy in fixed capital is one important factor, 
Modern machine production requires a very large outlay 
for such purposes and it is probable that fixed capital 
is an increasing element in the cost of producing manu- 
factured goods. Now within certain limits, at least, 
the cost of fixed capital does not increase as rapidly as 
the product of a factory can be enlarged. A large build- 
ing costing less than two small ones may furnish room 
for the same amount of machinery. Generally, too, the 
larger factory can be equipped with a smaller expenditure, 
in proportion to its capacity, for engines and other machin- 
ery. In the big establishment no machine is needlessly 
duplicated, while in two small ones costly appliances may 
stand idle for half the time because the product is not 
large enough to keep them fully occupied. Railroads, 
both steam and electric, water works, and lighting plants 
furnish striking illustrations of the economies in fixed 
capital that result from production upon a large scale. 
In any territory one such company can supply all the serv- 
ice required very much more cheaply than two, because 
with a single concern it is necessary to lay but one set of 
tracks or water mains or gas pipes or electric wires; and 
there may be a saving, as well, in the cost of power. This 
economy in fixed capital is very great in the industries 
last mentioned, but it is an important factor also in manu- 
factures and commerce. If the annual expenses for 
interest and repairs on fixed capital are $300,000 in any 
establishment, then the cost of this factor will be thirty 
cents per dollar of product when the output is $1,000,000. 



$6 THE LAWS OF PRODUCTION 

Now, if, by merely utilizing the plant to its maximum 
:apacity, the product can be increased to $1,500,000, the 
:ost of fixed capital will be reduced to twenty cents per 
unit of output. 

(2) Economy may be secured also in the outlay for 
circulating capital. A large factory may need less fuel 
than several smaller ones of no greater capacity. A big 
store does not need to keep on hand at all times twice the 
stock of goods that each of two smaller stores will require 
in order to supply promptly any probable demand of their 
customers. 

(3) Another advantage of a large concern is its ability 
to command the capital necessary for experimentation with 
new machinery and methods. Invention and experiment 
are often costly undertakings, and small concerns cannot 
afford to keep skilled inventors and expert chemists at work 
to improve the processes by which business is carried on. 

(4) Economy in skill often results from large-scale 
production. Labor can be more efficiently subdivided 
in a large factory, since all operatives can be allowed to 
specialize on a single process, while men of exceptional 
talent can be given the particular kind of work for which 
they are best fitted. 

(5) In many industries only a part of the raw materials 
can be employed in manufacturing the main product, 
so that much is wasted unless some way of utilizing it 
can be discovered. In a large business the amount of such 
waste becomes so great as to afford a strong incentive 
to devise methods of utilizing it. 1 In refining petroleum 

1 See the interesting and valuable monograph on " Utilization of 
Wastes," in Twelfth Census, Rep't. Mfgrs., IV, pp. 723-748. 



THE LAW OF ECONOMY IN ORGANIZATION 87 

material that formerly was wasted is now used in the 
production of lubricating oil, naphtha, paraffine, and a 
large number of other articles. So, too, in the beef and 
pork-packing industry, hides, hoofs, horns, blood, hair, 
and bristles are completely utilized in the manufacture 
of a great variety of by-products. 

(6) Finally great establishments find it convenient and 
profitable to carry on for themselves many allied or sub- 
sidiary processes. Oil refiners make their own barrels, 
tin cans, pumps, sulphuric acid, and many other supplies ; 
while sugar refiners secure raw sugar from their own 
plantations in Cuba, occupy their own wharves and ware- 
houses, and make their own barrels and boxes. In the 
iron and steel industry the principal producers began, 
a decade or more ago, to acquire mines of iron ore in 
Michigan or Minnesota, to purchase railways or steam- 
ships required for transporting this material to their fur- 
naces, and to purchase lands containing deposits of coal 
or limestone. Thus there has developed a process which 
has been called the integration of industry, by which the 
producers of the more highly finished products have 
sought to control all the preliminary stages of manufacture, 
and to secure their raw materials at the lowest possible 
cost. 

§ 49. It must not be inferred from what has preceded 
that every and all increase in the size of business under- 
takings necessarily leads to more economical opposing 
production, so that the process of concentra- forces- 
tion must continue until in every branch of industry a 
single company displaces all others. In railway trans- 
portation, indeed, and in the distribution of such com- 



88 THE LAWS OF PRODUCTION 

modities as water, gas, and electricity, experience does 
seem to show that, in any given district, one company 
can usually supply the entire demand more economically 
than two. But in agriculture precisely the reverse is 
true; while in manufactures and commerce it seems 
certain that not all the advantages are on the side of the 
mammoth establishment. The considerations that tell in 
favor of the enterprise of moderate size are as follows : — 

(i) In many cases it appears that the maximum effi- 
ciency of the mechanical processes is secured when a plant 
has attained a certain size. In some of the textile indus- 
tries, a factory of moderate size will insure the greatest 
economy of fixed capital attainable; and it is probable 
that in all branches of manufactures a limit is finally 
reached at which the further concentration of capital 
in a single establishment ceases to be profitable. In a 
sugar refinery from $4,000,000 to $5,000,000 may be 
invested before this point of maximum economy is reached, 
and in the production of iron and steel $10,000,000 may 
be required; but sooner or later it becomes impossible 
to increase the efficiency of productive forces by enlarging 
the size of a factory. 

(2) To an increasing extent power for manufacturing 
processes is distributed to a number of establishments 
from a central power station, with considerable advan- 
tages to smaller producers. As electric power comes into 
more general use, the importance of this consideration 
will be greatly increased. 1 

1 In 1890 all our manufacturing industries employed 5,954,000 horse- 
power, of which only 88,571 horsepower was rented from central power 
stations. In 1909, out of a total horsepower of 18,675,000 not less than 



THE LAW OF ECONOMY IN ORGANIZATION 89 

(3) Not infrequently a number of small establish- 
ments may be located in the same region and may cooper- 
ate to secure many of the advantages that larger producers 
enjoy. Small producers have combined to construct 
pipe lines, by which petroleum is transported from the 
oil regions to distant refineries; and have cooperated 
in the establishment of plants for the utilization of waste 
products. 

(4) New processes and improved machinery are often 
given wide publicity at the present day through trade papers 
and other agencies. This tends to disseminate informa- 
tion; and, as often as not, the improved appliances can 
be bought or rented by the small as well as by the large 
producer. 

(5) Another respect in which the balance of advantage 
may turn in favor of the smaller establishment is found 
in the necessity for securing skillful supervision. 1 The 
individual proprietor or the partner in an ordinary firm 
has the strongest conceivable inducement to industry and 
carefulness, and the smaller scale of his operations enables 
him to give his personal attention to the details of the 
business. In the eighteenth century Adam Smith had 
argued that corporations could never be managed so 
efficiently as business partnerships, since the hired man- 

1,872,000 was rented. Thus rented power increased from a little less 
than 1.5 per cent to over 10 per cent of the total power employed. Of 
the 1,872,000 horsepower rented, no less than 1,749,000 horsepower was 
supplied by electricity. 

1 In agriculture this consideration is especially important. Each five- 
acre field on a farm may be best adapted for raising a different crop. 
Only on a farm of moderate size can the varying capacities of the soil 
be studied, and the greatest economy secured. 



9 THE LAWS OF PRODUCTION 

agers of corporate enterprises controlled not their own 
capital, but that of other people. Up to the time at which 
he wrote, English experience seemed, on the whole, to 
justify this view; but in the nineteenth century corpora- 
tions learned to secure able management by offering large 
salaries and inducing their employees to acquire stock, 
thus gaining a personal interest in the success of the busi- 
ness. While corporation management, at the best, now 
seems to be highly efficient, it remains true, nevertheless, 
that it is not so uniformly good as to deprive Smith's 
criticism of all weight. It should be observed, moreover, 
that, even if the management remains equally honest 
and skillful, the difficulties of the task increase greatly 
as the scale of operations grows; and many things have 
to be left to subordinate officers who are not superior 
to the ordinary run of hired servants. Thus the race 
is not always to the swift; and the concern of moderate 
size, managed by its proprietors, may gain certain advan- 
tages that are denied to mammoth corporations. 

(6) Finally, it usually happens that the growth of any 
one establishment is limited by the necessity of finding 
a market for its product. In the local market an estab- 
lishment has an advantage over distant competitors; but 
as it seeks to extend its sales, the cost of securing the addi- 
tional business increases. This difficulty is greatest in 
industries that produce articles of which the use depends 
on a varying public taste or changing fashions; but it 
exists even with staple products, and tends powerfully 
to check the growth of an enterprise after a certain stage 
of development has been reached. 

§ 50. From all these considerations it is manifest that 



THE LAWS OF SUPPLY 



91 



it is impossible to formulate a single principle governing 
the economy of organization. In the distributive indus- 
tries the rule seems to be that any increase 

, . . , . . Conclusions. 

in the size of a business unit increases the 
efficiency of the productive process, at least up to the 
point where the local field is fully supplied. With other 
industries the law apparently is that, with modern machin- 
ery and processes, an increase in the scale of operations 
that a single enterprise conducts increases the efficiency 
of productive forces up to a certain point at which the 
maximum economy is attained, and that this condition 
of highest efficiency is reached before a single concern 
monopolizes an entire field. These conclusions are 
necessarily based upon our present experience with the 
movement toward concentration of production, and may 
require subsequent modification; they involve, too, a 
number of questions which cannot be considered fully 
until we reach the chapter devoted to the subject of 
monopoly. 

III. The Laws of Supply 

§ 51. The efficiency of productive forces must now 
be studied from a third point of view, — the conditions 
that prevail in an entire industry that is sub- variations in 
ject to the force of competition 1 and requires a SanOTtire* 
number of rival enterprises to produce the industr y- 
full supply. And here we shall be under the necessity 
of distinguishing sharply between two standpoints from 

1 An industry that is monopolized by a single concern comes under the 
laws governing the efficiency of production in one establishment. This 
subject has been treated adequately in the preceding pages. Here we 
need consider only those industries which are subject to competition. 



92 THE LAWS OF PRODUCTION 

which the industry may be studied; first, the condition 
of the industry for any brief period of time when its status 
may be regarded as fixed; and second, the condition 
that results from a change in the supply. 

§ 52. Proceeding in the order just indicated, let us 
consider the efficiency of the productive forces that are 
(a) under employed by a competitive industry at a 
tions; supply time when nothing occurs to alter materially 
femat?ng nd the su PPty or the demand. Under such con- 
unchanged. ditions we find that there are a number of 
different establishments which enjoy varying natural 
advantages, possess equipments of varying efficiency, 
and are managed with varying ability, so that the cost of 
production is not the same for all competitors. Of course 
the superior concerns are continually taking trade away 
from the inferior, which are constantly being driven out 
of business ; but such competition does not, as a matter of 
fact, establish a uniform level of costs. It is a matter 
of common experience that some men or companies in 
an industry make money when selling at prices that leave 
others little or no profit; and this could not be the case 
if the cost of production were the same in all establish- 
ments. In recent years when trusts have been organized 
in so many of our industries, this fact has been clearly 
revealed as soon as the various plants have been brought 
under one management. 

Upon these facts we base the law of varied costs : that, 
in any competitive industry, rival establishments will 
The law of furnish their respective portions of the supply 
varied costs. ai different costs. To the producer who, 
laboring under the greatest disadvantages or possessing 



THE LAWS OF SUPPLY 93 

the least skill, furnishes his part of the supply at the greatest 
cost, economists apply the name of marginal producer. 
In our study of the causes that determine value, we shall 
see that the marginal producer plays an important part 
in the process. 

§ 53. We now pass to the second standpoint from 
which the efficiency of an industry can be studied, and 
consider the variations produced by changes in {b) Under 
the supply. If the production of any commodity * ynamic . con * 
is to be increased, this can be accomplished voiving 

. changes in 

in one of two ways : either improvements may supply and 
be made that enlarge the product obtainable 
from a given amount of land, labor, and capital, or 
additional amounts of the three factors must be invested 
in the industry. If the need for an increased supply 
stimulates improvements, or enables the competitors to 
increase the scale of their operations — with a consequent 
economy in production — then the marginal cost of the 
entire supply is likely to decline. If, however, such 
improvements are not made, the enlargement of the 
supply will, not improbably, raise the marginal cost of 
production ; because it will be necessary to utilize inferior 
natural advantages or to call inferior labor or inferior 
organizing ability into the business. 

Thus if the market requires an increase of ten per cent 
in the output of steel rails, the additional supply might 
be procured by operating the existing plants Th 
to the full limit of their productivity, and by marginal 

r J J cost of an 

enlarging the capacity of some of the best of increasing 
them. These changes would result in increased supp y ' 
efficiency ; and the marginal cost of production might be 



94 THE LAWS OF PRODUCTION 

somewhat reduced so that the increased supply would 
actually be procured at a decreased marginal cost. Upon 
the other hand, if the supply of wheat were to be in- 
creased by twenty per cent, it is possible that inferior 
lands would need to be taken into cultivation, and that 
the marginal cost of production would rise. 

From consideration of such cases as these, some econo- 
mists have been inclined to hold that the supply of a manu- 
Manufactures ^ acturec ^ product can regularly be increased at 
and agricui- a decreasing marginal cost ; and that the supply 
of agricultural produce can be enlarged only 
at an increasing marginal cost. It is probable that such 
a view exaggerates the differences between manufacturing 
and agricultural industries. In manufactures it is cer- 
tainly true that the producers are less likely, when they 
undertake to enlarge their output, to be obliged to utilize 
inferior natural agents ; x and, for this reason, it is unlikely 
that an increased supply will be furnished at a greater 
marginal cost. But, upon the other hand, it cannot be 
doubted that agricultural methods are susceptible of 
constant improvement; and that sometimes the need 
of enlarging the supply might lead to a better organiza- 
tion of production and a reduction of the marginal cost. 
Moreover, it is not true that the need of increasing the 
supply invariably stimulates manufacturers to improve 
their methods of production and the organization of their 
industry ; much depends upon the temper of the producers 

1 It should be remembered, however, that manufacturing industry is 
dependent upon agricultural and mining industry for its materials, which 
form a very important element in the cost of production. It is probable 
that a very great increase in the output of manufactures would raise the 
marginal cost of the larger supply of materials that would be required. 



THE LAWS OF SUPPLY 95 

and upon the prospect of the increased demand proving 
permanent. 

Conceivably, the supply of any commodity might be 
enlarged at a uniform cost; but it is hardly probable 
that the change in output will leave the Tneprob- 
conditions of production unaltered, so that unifo^mar- 
the usual result will be to raise or to lower ginaicost. 
the marginal cost. The law, therefore, that governs the 
efficiency of production when the supply of a commodity 
is enlarged may be stated as follows : An increased supply 
0} a commodity will usually be obtained at an increased 
or decreased marginal cost, the latter result being more 
likely to occur in manufacturing industry than in agri- 
culture. 

Only a few words are needed to explain what must 
happen when the production of a commodity is reduced. 
If such a reduction is permanent, the producers ( 2 ) The mar- 
will be obliged to compete with each other f JecrelSng 
more sharply for what trade remains, and su PP ! y- 
this competition will drive out of business those concerns 
which have been at the greatest disadvantage; i.e., the 
marginal producers. For this reason a permanent reduc- 
tion of the supply will have the effect of reducing the 
marginal cost of production. 

§ 54. We have now considered the conditions under 
which the supply of any commodity is produced, and 
have seen that the efficiency of production 

. vi i 1 " • Conclusions. 

is likely to vary whenever a change occurs in 
the total output. The principles that govern such varia- 
tions may be termed the laws of supply, and may be con- 
sidered analogous to the law of demand, with which our 



96 THE LAWS OF PRODUCTION 

discussion of consumption closed. In the following 
chapter we shall appeal to the laws both of demand and 
of supply in our explanation of the forces that determine 
the value of commodities. 

FOR SUPPLEMENTARY STUDY 

General : Marshall, Economics, 227-249, 357-370, 393-400 ; Nich- 
olson, Political Economy, I, 122-130, 138-174, 



CHAPTER VI 

THE THEORY OF EXCHANGE 
I. The Advantages of Exchange 

§ 55. The advance of the human race from the lower 
to the higher stages of economic development has been 
accompanied and greatly aided by a constant extension 
of the process of exchange. Confined in the T he influence 
earliest times to dealings in easily transport- of commerce - 
able articles, such as precious stones or metals, ivory, 
spices, and fine fabrics, commerce has progressed with 
improved methods of transportation, so that even bulky 
and perishable commodities can now be readily exchanged 
between distant places. Withal, commerce has ever been 
a prime civilizing agency, bringing distant and hostile 
people into friendly intercourse, broadening men's ideas, 
extending knowledge of all the arts, and tending with 
increasing power to the maintenance of peace and inter- 
national comity among the nations of the earth. 

§ 56. It was once commonly believed that an exchange 
of products could benefit but one of the two parties to the 
transaction, since it was thought that what Exchange 
one gained the other must lose. This view, to both ase ° US 
which has not yet entirely disappeared, is wholly P arties - 
unwarranted, as will be made evident by considering the 
reasons why men desire to effect exchanges. Such a con- 

97 



q8 THE THEORY OF EXCHANGE 

sideration will demonstrate that ordinarily both parties 
to an exchange may and do profit thereby. 

In the first place, individuals, communities, and even na> 
tions differ very widely in tastes and customs, so that one 
Reasons for person or group of persons may prize highly 
geousnessof a commodity that possesses little utility for 
exchange. others. Under such circumstances, which are 
the rule rather than the exception, an exchange of com- 
modities will place each article where it will have the 
greatest utility, and increase materially the sum of human 
satisfactions. Again, both individuals and communities 
have different aptitudes for the various kinds of productive 
labor; and, by exchanging their products, can devote 
themselves to the particular callings for which they are 
best fitted. In this way the production of wealth will be 
vastly increased, and all concerned may be greatly bene- 
fited. Then it is usually true that persons and communi- 
ties have different natural environments ; arable or pasture 
lands, valuable mines or forests, sea fisheries, water 
powers, and favorable climatic conditions are not every- 
where available, or available in equal degree. By ex- 
changing cotton cloth for wheat, Massachusetts has been 
enriched by the bounty of the fertile prairies of the West, 
while Iowa and Kansas have profited by the water power 
and acquired skill of New England. 

II. Market Value 

§ 57. In the course of trade, commodities exchange 

for each other in certain definite proportions. A bushel 

of wheat, for instance, may command two bushels of oats ; 

and, when this is the case, the value of wheat is said to 



MARKET VALUE 99 

be twice that of oats. It appears, therefore, that the 
word "value" refers to the relations that exist between 
commodities in the act of exchange; and we value and 
may define it as the power which a commodity price - 
has to command other commodities in exchange. The 
value of every sort of merchandise is usually expressed 
in terms of money, for which all goods are generally sold. 
If wheat is worth ninety cents in money, and the price of 
corn is sixty cents and of oats forty- five cents, we know at 
once the relative value of the three grains without going 
to the trouble of exchanging a bushel of one for a bushel 
of the others. A price, in fact, may be defined as a value 
expressed in terms of money. 

§ 58. Whenever we say that the price of wheat is ninety 
cents a bushel, we refer to the value in a certain market 
and at a certain time. Between different 

Markets. 

markets variations of prices may exist, and from 
one time to another changes are likely to occur. By 
a market is meant the establishment of such free inter- 
course between traders that a single price rules for a given 
commodity at a given time. Chicago, New York, and 
Liverpool have formed one market for the exchange of 
wheat ever since the electric telegraph brought these 
places into such close communication that the daily quo- 
tations must be practically the same, allowance being 
made, of course, for the cost of transporting grain to the 
Atlantic seaboard and across the ocean. In general, 
wholesale markets of staple commodities are now of 
national or international extent because modern methods 
of communication insure the closest intercourse between 
dealers in distant places, and make it possible for uniform 



100 THE THEORY OF EXCHANGE 

prices to prevail over wide areas. In retail trade, upon 
the other hand, prices not only vary from one city to an- 
other, but are not likely to be uniform in all parts of a 
single city of any considerable size. This is because 
retail buyers, i.e., the final consumers, do not take the 
trouble to watch prices over wide areas of country, but 
purchase from local dealers at such prices as are asked. 

The existence of a market, it will be observed, in which 
the same product exchanges at a uniform price, presup- 
poses the condition of competition. In the 

Competition. . . , 

widest sense of the term, competition denotes 
any struggle of conflicting interests in which each person 
endeavors to accomplish his own ends in the face of 
similar efforts upon the part of rivals. In a market, 
competition may mean either one of two things. It may 
mean the endeavor of rival sellers to dispose of their goods 
or services on the best possible terms; and, on the other 
hand, the efforts of rival buyers to purchase goods at the 
best advantage. Or, in the second place, it may mean 
the process of bargaining between buyers and sellers for 
the best terms in each transaction. Where there are many 
buyers and many sellers, competition between rival sellers 
on the one hand and rival buyers on the other will usually 
establish a uniform price without any bargaining between 
buyers and sellers. In fact, much bargaining between 
buyers and sellers is likely to break the body of traders 
up into groups and to destroy uniformity of prices. 

§ 59. We are now ready to consider the causes by 
Market which value is determined, and shall find it 

value - convenient to begin with the problem of mar- 

ket value. During a recent year the prices commanded 



MARKET VALUE 101 

by a bushel of wheat in New York ranged from fifty- 
six to eighty-three cents, and were seldom exactly the 
same on any two successive days. These fluctuating 
daily quotations were the market prices of that commod- 
ity; and they measured the market value, which may be 
defined as the actual exchange power of a commodity in 
a market from day to day. 

Investigation of the manner in which market value 
is determined will demonstrate that it depends upon the 
forces of demand and supply. By demand, 

. . . Demand. 

as we have seen, the economist means desire 
coupled with the ability to purchase. It is small when 
buyers will take but a small amount of a commodity out 
of the market, and large when a greater quantity is bought. 
Our study of the consumption of wealth has already 
enabled us to formulate a general law of demand; and 
it was shown that demand varies 1 directly as the marginal 
utility of a commodity, and inversely 2 as its price. 

The supply of commodities in a market must be dis- 
tinguished clearly from the stock of goods which pro- 
ducers or middlemen have on hand. The 

Supply. 

stock is the entire quantity of goods under the 
control of the sellers, while the supply is the amount that 
will be offered for sale at a given price. The stock is in 
the hands of men who have produced or purchased it 

1 Since we are now studying the value of a commodity for short periods 
of time, we may omit the third factor mentioned in the previous chapter, 
viz., changes in the resources of consumers. 

2 The words " directly " and " inversely " are not employed here in 
their strict mathematical meaning. Demand increases as utility increases, 
but not necessarily in the same proportion ; it varies as price varies, but 
not proportionately. 



102 THE THEORY OF EXCHANGE 

for the sole purpose of selling at a profit; these holders, 
in fact, could have no conceivable use for any considerable 
part of their stock for purposes of personal consumption. 
They will offer for sale from day to day so much of the 
stocks as they consider it desirable to sell at existing prices. 
High prices will induce them to throw large quantities 
of goods into the market ; while, if prices are low, smaller 
quantities will be offered for sale, and the remainder of 
the stock reserved until the market improves. 

§ 60. Within a market at a given time, the price of a 
commodity will be fixed at a point where demand and 
Market value supply will be equalized. Let us suppose 
suppiyand tnat se U ers °f wheat have on their hands a 
demand. stock of 1,000,000 bushels ; that, at a price 
of eighty cents per bushel, they will sell the entire stock; 
that a price of seventy cents will induce them to place 
800,000 bushels upon the market; and that a price of 
sixty cents would reduce their offerings to 600,000 bushels. 
Upon the other hand, we may assume that the buyers 
will purchase 1,000,000 bushels of wheat at sixty cents; 
800,000 bushels at a price of seventy cents; and 600,000 
at a price of eighty cents. It is evident that, under such 
conditions, a price of seventy cents will equalize supply 
and demand; and a little reflection will show that this 
must be the ruling price for the day, since competition 
of buyer with buyer and of seller with seller will make no 
other result possible. If the bidding by some buyers 
should raise the price to seventy-one cents, others would 
reduce their purchases or retire from the market, so that 
the demand would quickly fall from 800,000 bushels to 
some such figure as 790,000. At the same time the addi- 



NORMAL VALUE 103 

tion of one cent to the price would increase the offerings 
so that the supply might rise to 810,000 bushels. Such 
a situation would make it impossible for dealers who 
are anxious to sell 20,000 bushels to find a customer for 
their wheat, and would lead some of them to lower the 
price to seventy cents. Where competition exists, the 
demand and the supply must be equalized. 

§ 61. In our chapter upon the consumption of wealth 
it was shown that commodities differ very greatly in the 
sensitiveness with which the demand for them Elasticity 
responds to changes in price. Articles for ofdemand - 
which the demand is inelastic must rise in price materi- 
ally before consumers will reduce their purchases con- 
siderably; and, therefore, a shortage in the supply will 
increase prices very much more than would be possible 
if the demand were elastic. Upon the other hand, if the 
stock is greatly increased, the sellers must reduce their 
price considerably before they can dispose of materially 
larger quantities. We learned also that, if hard times 
compel the consumers to retrench in their expenditures, 
the prices of articles with an elastic demand will suffer 
much earlier and more extensively than the prices of the 
other class of goods. 

III. Normal Value 

§ 62. Although market values are constantly changing, 
an underlying force controls ultimately all such fluctua- 
tions. Experience shows that an unusually Normal 
high price is not likely to be maintained for value - 
a long time, and that exceptionally low prices are equally 
unstable. Moreover, if we compare the average market 



I CM THE THEORY OF EXCHANGE 

prices for a considerable period, we shall find that the 
relative prices of different commodities remain tolerably 
constant, so long as no important changes occur in the 
uses to which they are put or the conditions of produc : 
tion. Some force, evidently, sets a limit to the fluctua- 
tions of the market, and restores prices continually to 
what the business world considers a normal level; in 
other words, there is a certain point around which market 
prices play. In this way we arrive at the concept of 
normal value or price, which may be defined as that value 
or price to which, under given conditions, market prices 
constantly return. 

§ 63. Commodities are produced by capitalists and 

laborers who desire to secure the largest possible returns 

for the sacrifices incurred in the process of 

The force m x 

governing production. In so far as they have the power 
of choice, producers will endeavor to invest 
their labor and capital in those occupations which promise 
them the best income from their exertions; and here we 
discover a force that tends to increase or restrict the stock 
of any commodity, and thus to affect the movement of 
prices. If two articles that require the same amounts 
of sacrifice for their production happen to have different 
values in the market, producers will increase the supply 
of that article which commands the higher price, and 
restrict the output of the other. The increased produc- 
tion of the dearer article will gradually lower its market 
value to the level of the other one representing the same 
expenditure of labor and capital. In this manner the 
cost of production influences the supply, and therefore the 
price, of commodities. 



NORMAL VALUE 105 

The competition of the market, by which prices are 
regulated from day to day, has been called " commercial 
competition" ; and to the competition of pro- industrial 
ducers who endeavor to regulate production com P etltlon - 
according to the demands of the market, the term u indus- 
trial competition" has been applied. It is important for 
us to examine the actual processes by which this indus- 
trial competition operates. In case any industry, on 
account of the high prices now received for its products, 
becomes exceptionally profitable, many employers already 
engaged in it will be stimulated to enlarge their present 
plants; while outside capitalists, seeing an opportunity 
to make large profits, will establish new enterprises. In 
a progressive country, in every prosperous year, there 
is a large mass of accumulated profits which seeks invest- 
ment; and, besides, it is possible to withdraw from the 
least profitable industries considerable capital that is not 
too highly specialized, and employ it where it will secure 
a better return. On the other hand, if the market price 
of any commodity has fallen to such an extent that pro- 
ducers are confronted with the prospect of small profits, 
or even loss, employers will begin to operate their factories 
upon half time or will close their doors and wait for con- 
ditions to improve. Some establishments, under such 
conditions, are likely to fail, and the capital invested in 
them is thereby removed from the field ; while a few may 
find it possible to transfer a part of their free, or relatively 
free, capital to some more profitable enterprise. The 
burden of "hard times" falls most heavily upon the 
marginal producers, who, as we learned in the last chapter, 
have been producing at the greatest expense; and it is 



106 THE THEORY OF EXCHANGE 

chiefly through the failure or voluntary withdrawal of 
such establishments that the supply is reduced to a quan- 
tity that can be marketed at a profit. 

It appears, therefore, that, just as the marginal utility 
determines the demand for commodities, so the cost of 
cost of production regulates the supply. We must, 

production. then ^ un( iertake a careful analysis of the dif- 
ferent elements that enter into the cost of production, 
and must inquire : What things do individual producers, 
both capitalists and laborers, sacrifice in order that the 
work of production may be carried on? ■ 

§ 64. In the first place, it should be observed, the natu- 
ral agents utilized in production are not, under ordinary 
circumstances, an element in determining the 
of cost of cost. 1 Such agents are a part of nature's contri- 

production. . . 1 1. 1 

bution ; they do not increase, but rather lighten, 
the sacrifices that producers undergo. What production 
really costs to the persons who carry it on is the sacrifice 
of the labor and capital required for the creation of utilities. 
The first element in producers' cost is the labor devoted 
First eie- to production. It may be expended indirectly 
ment: Labor. - m ^ e manufacture of capital needed in an 
industry, or directly in the production of consumable 

1 If the supply of any material, such as copper, is monopolized, then 
those who control the mines may exact a large monopoly profit over and 
above the cost of production. This monopoly profit becomes an element 
in the cost of production in all industries that use copper. We are now 
studying competitive, not monopoly, prices, and will not pursue this sub- 
ject further. In the case of land, which ordinarily commands a rent, it 
might seem, at first thought, that this rent must be an element in the cost 
of production. It is, of course, an item of expense to the producer, but 
we shall see that it is not one of the factors determining the normal value. 
This will be made clearer when we come to the discussion of rent. 



NORMAL VALUE IO/ 

commodities. The sacrifice which labor represents is 
in all cases the cost of supplying the required number 
of workmen. 

Laborers are divided into various classes or grades, 
each of which possesses its own standard of living; and, 
in proportion as the standard is high or low, the cost of 
supplying any particular sort of labor will be larger or 
smaller. Workmen suitably trained to undertake delicate 
and responsible tasks cannot be had unless the remunera- 
tion is high enough to cover the cost of rearing and edu- 
cating such persons. On the other hand, work that calls 
for no skill and places no responsibility upon the laborer 
can be done by persons whose standard of living is the 
lowest, and represents, as these things go, a small labor 
cost. So far as the element of labor is concerned, the 
cost of producing a commodity depends upon the standard 
of living of the class of workmen which the industry 
requires. 1 

The second element in producers' cost is the expenditure 
of capital. In so far as capital represents mere labor 
devoted to the production of buildings, 
machines, or materials, the sacrifice occasioned element: 
by its use has been fully accounted for in the 
previous paragraph. But, as has been explained else- 

1 Where there is a practicable alternative for the laborer, the cost of 
obtaining his services may be influenced by one or two other factors. 
Work that is held in low social esteem will be avoided, unless the remun- 
eration is somewhat more than enough to equal the standard of living of 
laborers of the grade required. So, too, work that involves risk of life or 
limb must be more highly remunerated. This is true, however, only when 
workmen have practical freedom of choice. Much unpleasant work, or 
work that is dangerous to health or to limb, is performed by men who 
receive the lowest wages, because there is no practicable alternative. 



108 THE THEORY OF EXCHANGE 

where (§ 29), the formation and renewal of capital require 
abstinence, or waiting, as well as labor; and in this we 
find a second element of sacrifice, independent of labor. 
This is not to say that every portion of a given stock of 
capital represents the same amount of sacrifice because, as 
we have seen, millionaires can accumulate capital far more 
easily than persons with small incomes. But it does mean 
that every unit of capital represents a sacrifice of the pres- 
ent to the future ; and, therefore, involves something more 
than the mere expenditure of labor in producing it. 1 

§ 65. The problem of normal value is somewhat com- 
plicated by the fact that the cost of producing any com- 
modity is not the same in all establishments 

Different J 

costs of pro- (§ 52). Does the normal value of a commodity, 

duction. iiii r 1 

then, depend upon the average cost of produc- 
tion, upon the lowest cost, or upon the highest? The 

1 A simple illustration will make evident the reality of the sacrifice 
represented by waiting. Suppose that five men, each furnishing his own 
tools and subsistence, undertake to make a boat that cannot be completed 
in less than five months. When finished, the boat will be worth $2000. 
If all the men wait until the boat is completed and sold, they may each re- 
ceive $400, assuming, for convenience, that their labor has been of the 
same value. But now suppose that one of the men, instead of waiting five 
months for his share of the product, demands that the others advance 
$400 to him at the end of the first month. He would quickly be told that, 
since nothing was to be realized from the undertaking for five months, he 
could not expect to share equally with his companions in the distribution 
of the $2000 then available unless he would wait until the boat was com- 
pleted and sold. He would not be given at the end of one month even 
one fifth of the $400 that would be due him at the end of five months. 
For him to receive advances of $80 at the end of each of the first four 
months would result in an unequal distribution of the sacrifice represented 
by waiting. He might, however, justly receive at the end of one month 
the present worth of the $80 which would be due for that month's labor 
when the boat had been completed. 



NORMAL VALUE 109 

answer must be that it is governed by the highest, or 
marginal, cost of production. If the amount of wheat 
normally consumed in any community is 1,000,000 bushels, 
the price must be high enough to cover the cost of pro- 
duction upon the poorest land that needs to be cultivated 
in order to obtain so large a supply; for otherwise such 
lands would go out of cultivation, the supply would fall 
below 1,000,000 bushels, and the price would be restored 
to the higher figure. The same thing is true in manu- 
factures, or any other industry; consequently consumers 
must normally pay enough to cover the cost of producing 
the marginal unit of the supply. Moreover, competition 
between producers will not permit the price to be main- 
tained for long above the point just indicated. If prices 
rise above the normal level, poorer lands and inferior 
factories can be brought into use, the supply will increase, 
and competition among producers will reduce prices to 
the former status. Under competition, therefore, the 
point around which market prices play is the marginal 
cost of production. 

Between the lowest cost of production to the most skill- 
ful or the best situated producer and the marginal cost, 
the difference will be greater in some industries m , 

The extent 

than in others. In agriculture the product of of these 
any given tract cannot be increased beyond 
a certain point except under conditions of diminishing 
returns; so that, if the supply of any product is to be 
enlarged very greatly, it will be necessary to bring into 
cultivation one grade of inferior land after another, with 
the result that the marginal cost of production is likely 
to rise far above the cost upon the most fertile lands. 



IIO THE THEORY OF EXCHANGE 

In manufactures and commerce, on the other hand, the 
product that can be obtained from any piece of land can 
be largely increased, and it is easier to secure economies 
from concentrating production in large establishments; 
so that there is less reason for great differences between 
the costs incurred by the various competitors. 

It has now been shown that market value depends 
primarily on the marginal utility of a given supply of any 
„ . , x commodity, and that normal value, to which 

Marginal cost J \ 7 

the determin- the fluctuations of the market must conform, 

ing factor. . 111 -, r , 

is governed by the marginal cost of production. 
If the market price is the one that equalizes supply and 
demand at any particular time, the normal price is the 
one that will equalize production and consumption. 
"Value," says Professor Marshall, "rests like the key- 
stone of an arch, balanced in equilibrium between the 
contending pressures of its two opposing sides. The 
forces of demand press on the one side, those of supply 
on the other." * 

§ 66. In this discussion we have assumed that buyers 

and sellers, consumers and producers, are conducting 

, their affairs with full knowledge of the demands 

Importance of ° 

theory of of the market and of the conditions of pro- 

normal value. . 

auction; and we have assumed, furthermore, 
that absolute freedom of competition has prevailed. It 

1 The following illustration may make the theory of normal value some- 
what clearer. Suppose that the movements of market prices show that 
consumers will buy 100,000 tons of pig iron at $20 per ton, and that their 
purchases will increase to 300,000 as the price gradually falls to $10. 
Suppose that the best situated furnace can supply 50,000 tons at a price 
of $10, and that other furnaces can supply additional amounts at prices 
Vhat gradually increase until 300,000 tons would come into the market 



NORMAL VALUE 



III 



is needless to say that such conditions are realized only 
imperfectly in the actual world of business, and that prices 
cannot always be determined in the manner which hag 
been described. This fact must be taken into account 
before we dismiss the subject of value, and in the next 
part of this chapter will receive careful consideration. 
But when all such qualifying circumstances are given 
due weight, it remains true that our theory of normal 
value possesses the highest theoretical and practical im- 
portance. It is based, in fact, upon a study of underlying 
forces that no economist or man of business can afford 
to neglect. 

if the quotations should rise to $20. Then the following table ma y 
show where the pric<? must be fixed in order to adjust production t,m 
consumption : — 



Demand 


Supply 


Price 


Tons Bought 


Price 


Tons Produced 


#20 


100,000 


#20 


300,000 


18 


150,000 


18 


250,000 


16 


200,000 


16 


220,000 


15 


220,000 


*5 


200,000 


14 


230,000 


14 


l8o,000 


13 


240,000 


13 


1 70,000 


12 


250,000 


12 


150,000 


IO 


300,000 


10 


100,000 



Under such conditions the normal price would be somewhere between 
$15 and #16. Perhaps a price of $15.50 would reduce the demand to 
210,000 tons, and increase the supply to precisely this figure. Observe 
that the differences between the lowest and the marginal cost increase as 
the supply is enlarged. 



112 THE THEORY OF EXCHANGE 

IV. Exceptions to the Theory of Normal Value 

§ 67. It is now necessary to consider a number of cases 
in which values do not conform to the laws which have 
just been explained. Some of these may be 
taxation, dismissed with the mere mention. Custom, 
for instance, often deters buyers from com- 
peting vigorously with retail dealers in the purchase of 
ordinary articles of consumption; so that retail prices, 
in the absence of this competition, diverge widely from 
the normal level. Taxes that are levied upon a few com- 
modities, such as beer, spirits, or tobacco, increase the 
expense of production above the level represented by the 
labor and productive capital employed. And finally, the 
establishment of a monopoly gives to producers the power 
to raise prices far above the cost of production. This 
subject of monopoly, however, will require a separate 
chapter. 

§ 68. An important class of exceptions arises from 
the fact that producers, especially laborers, are not always 
Failure of ^ ree to choose the occupations that they enter, 
competition. Unskilled laborers can engage only in the 
humblest callings; skilled workmen lose the benefit of 
their acquired dexterity if they abandon the craft for 
which they are trained; and poverty or ignorance fre- 
quently prevents men from moving to the places where 
their labor would be in the greatest demand. In all such 
cases there may be little freedom of choice, and laborers 
may be obliged to turn to anything that offers, with the 
result that there is a failure to realize perfect competition. 
Value cannot be adjusted to the cost of production unless 



EXCEPTIONS TO THEORY OF NORMAL VALUE 113 

producers are able to insist on getting a remuneration 
proportioned to the sacrifices incurred; and when a mass 
of unskilled labor can be had at "starvation wages," a 
commodity may be placed in the market for less than its 
normal price. 

§ 69. The investment of vast amounts of fixed capital 
in modern industrial enterprises has introduced into 
business a new cause of disturbance of prices. 

\ # The effect of 

A large fixed capital usually is a specialized large fixed 

. , , . , capitals. 

capital, and is an investment that cannot, 
without great or even total loss, be withdrawn from the 
particular line of business to which it is expressly adapted. 
Consequently, whenever prices fall below a figure which 
will pay all the expenses of production and leave a fair 
profit, the managers of such large specialized capitals find 
themselves in a peculiar position. They find it impos- 
sible to go out of the business without incurring enormous 
loss ; and at the same time it is difficult to curtail produc- 
tion without incurring an almost equal loss, a fact which 
requires further explanation. Specialized capital in the 
form of buildings and costly machinery requires constant 
attention and renewal, and oftentimes machinery depre- 
ciates very rapidly when it is allowed to remain idle. 
The expenses for interest and replacement of fixed capital 
continue about the same whether an establishment does 
a large business or remains idle. Moreover, insurance 
expenses and taxes remain about the same through dull 
times as through good. And the salaries of the most 
valuable, and therefore the most highly paid, employees 
may also be nearly the same, since trained superintend- 
ents and highly skilled mechanics are not always discharged 



H4 



THE THEORY OF EXCHANGE 



even if business is temporarily suspended. The principal 
"variable expenses," which depend upon the amount of the 
product turned out, are the expenses for the less valuable 
kinds of labor and for materials. The result is that when 
prices fall below a point at which they yield a fair profit 
to the producer, the managers of very large establishments 
will not promptly reduce the product which they turn 
out. They know that the fixed expenses of their estab- 
lishments will not be greatly decreased by running for 
shorter hours or by temporarily suspending production. 
Each manager will be likely to calculate that if he can sell 
his product for anything more than enough to cover the 
cost of materials and of common labor, he will have just 
so much toward paying the fixed charges ; and that if, on 
the other hand, he refuses to produce at the lower prices, 
he will not be earning any part of the fixed expenses. The 
result is that, wherever large plants exist, a fall of prices 
will not promptly check the output of commodities, since 
each producer may endeavor to secure something toward 
paying his fixed expenses, even if he is obliged to sell at 
a price which little more than covers the cost of materials 
and common labor. Prices may remain below the full 
cost of production for a long time whenever such a condi- 
tion of affairs exists. 

§ 70. We must consider one other case in which it is 
difficult to trace the relation between value and costs. 
Products and This occurs in its simplest form when an in- 
by-products. dugtry has one chief product upon which efforts 
are mainly concentrated, but also turns out a by-product. 
Thus, cattle may be raised for the purpose of securing 
beef; but hides, horns, hoofs, and bones may be obtained 



EXCEPTIONS TO THEORY OF NORMAL VALUE 115 

as by-products. Similarly, wheat is a main product, and 
straw a by-product; or illuminating gas is a principal 
product, and coke a by-product. Under such circum- 
stances how will the values of the main products and of 
the by-products be adjusted? The general principle is 
that the combined value of the main product and the by- 
products will approximate the total cost of carrying on the 
business. Producers will endeavor to regulate the produc- 
tion of joint products in such a way that the largest total 
return can be secured from the sale of all the products. 
Usually this can be done by producing all the principal 
product that can be sold at good prices, and then selling 
the by-products at any prices that will induce consumers 
to take them out of the market. If the price of the prin- 
cipal product rises, production will be increased, larger 
stocks of by-products will be secured, and their price will 
usually have to be lowered in order to dispose of them. In 
all cases, however, the total prices of all products will con- 
form to the total cost of production; while the relative 
prices of the different products will be determined by the 
relative demand of the market for each commodity, in 
the quantities furnished by the business. 

FOR SUPPLEMENTARY STUDY 

General: Bullock, Selected Readings in Economics, 354-386; 
Hadley, Economics, 64-96; Marshall, Economics, 401-570; 
Seager, Introduction to Economics, 81-106; Taussig, Prin- 
ciples of Economics, Bk. II. 



CHAPTER VII 

MONEY AND CREDIT 
I. Metallic Money 

$ 71. The earliest exchanges were effected by barter. 
Each party to a transaction traded goods that had little 
Bart utility to him for other goods that had more. 

But in the direct exchange of one commodity for 
another there are serious disadvantages. A horse cannot 
be bartered for a cow unless each party to the exchange 
wishes to obtain precisely what the other has to offer, and 
such a coincidence of desires does not often exist. Then, 
too, many commodities are not divisible into fractional 
parts ; although three hats may be exchanged for a coat, 
it is impossible to obtain one hat by offering one third of 
a coat in payment. Again, if one hundred different arti- 
cles are continually bartered for one another, they may 
exchange in any one of 4950 combinations; and it is 
necessary for traders to know all of these exchange ratios 
if they would avoid being cheated. 

§ 72. Gradually men devised a method of avoiding 
these difficulties. They saw that, while some commodities 
The origin were demanded only upon certain occasions 
of money. or unc [ er cer tain conditions, other goods were 
almost invariably in demand, and were acceptable to 

116 



METALLIC MONEY 



117 



nearly all persons. Among hunting tribes skins of animals 
were always in demand, since they were the principal 
product of labor, and were durable and useful for many 
purposes. With pastoral peoples cattle and sheep possessed 
this quality, since they were useful in very many ways and 
any person could without trouble add them to his herds. 
So, among the American Indians, strings of wampum 
were objects of general desirability, since they served to 
gratify a universal desire for ornament. When it was 
found that any commodity was always in demand, a way 
was opened by which the difficulties of barter could be 
avoided. If a man possessed corn and desired to exchange 
it for clothing, he need no longer find another person who 
desired to exchange precisely the right kind of clothing for 
the exact amount of corn offered. He would find it advan- 
tageous to accept furs, or cattle, or any universally desir- 
able commodity in payment for his corn ; and then he could 
easily find many people who would be willing to exchange 
clothing for the furs or cattle. 

In this manner the exchange of product A for product 
B is broken up into two distinct processes: (1) the sale 
of A for some universally acceptable article, 

J r 7 Money the 

C, which serves as a medium of exchange ; and medium of 
(2) the purchase of B by means of this medium, 
C. In this way the article that serves as an intermediary 
acquires a new use. Formerly it was a mere commodity, 
valued simply as an object of personal consumption; now 
it is a peculiar commodity which has acquired the addi- 
tional function of serving as a medium of exchange. Such 
a commodity is money. 

§ 73. A list of the various articles that have been, at 



Il8 MONEY AND CREDIT 

different times or places, employed for this purpose could 
be made extremely long. Besides cattle and furs, rice, 
The money tea, salt, tobacco, dates, cocoanuts, grains, 
metais. cowry shells, and many different metals have 

served as money. In time the metals proved to be superior 
to other commodities; and, in the end, gold and silver 
displaced the baser metals. The predominance of gold 
and silver has been due to a number of reasons: — 

(i) The beauty of the precious metals made them 
universally desired for the purpose of ornamentation. 

(2) Being difficult to procure, they had a very high 
power in exchange ; so that small amounts of them would 
command large quantities of other commodities, which is 
another way of saying that gold and silver are highly 
portable. 

(3) They are durable and can readily be distinguished 
from other substances. They are highly divisible and 
malleable, so that they can easily be converted into coins 
of uniform quality and weight. 

(4) They are extremely stable in value. The world's 
stock of gold money, bullion, and wares may be estimated 
at about $10,000,000,000 at the present day, while the 
annual output of all the gold mines is about $450,000,000. 
The result is that, unlike wheat or cotton, the value of gold 
is but slightly affected by changes in the amount produced 
from year to year ; so that the yellow metal can be accepted 
for commodities or services with confidence that the 
medium of payment will not fluctuate sharply in value 
from one season to another. Moreover, on account of its 
portability, the value of gold will be substantially the same 
in all countries. 



METALLIC MONEY 119 

§ 74. At first the precious metals circulated by weight, 
and those who handled them were obliged to provide 
means of testing their purity and determining 
their weight. Such inconvenient methods were 
at length rendered unnecessary by the introduction of 
the process of coinage. The first step in this direction 
was to impress upon a bar or ring or wire of the metal a 
stamp certifying to the weight and fineness, and this work 
was often done by goldsmiths upon private account. 
Gradually, in order to have greater security and uniform- 
ity, governments assumed exclusive control of the pro- 
cess, and put an end to all private coinage. Improvements 
in the art finally led to stamping both sides of the coin and 
milling the edges, so as to make attempts to tamper with 
money as difficult as possible; and the designs impressed 
upon the metal were made delicate and intricate in order 
to foil counterfeiters. Thus with a well-develcped coin- 
age system, money passes by tale, i.e., by count; and 
traders need no longer resort to weighing in order to avoid 
being cheated. 

Free coinage exists when any owner of bullion has the 
right to take the metal to the mint and have it coined into 
money. The United States, for instance, at „ 

J Free coinage : 

the present time, allows the free coinage of gold gratuitous 
but not of silver. No inconsiderable expendi- 
ture of capital and labor is required for the operation of a 
mint, and governments have often thrown upon the per- 
son who presents bullion the cost of converting it into coin. 
In the United States, however, no charge is made for 
coining standard gold bullion, i.e., bullion that is nine 
tenths fine; so that the coinage of gold is gratuitous, as 



120 MONEY AND CREDIT 

well as free. Since coinage is gratuitous, the amount of 
bullion coined into an eagle is always worth $10; and, 
since the eagle contains 232.2 grains of fine metal, 
the mint price of an ounce of gold is $20.67yo 8 o. 1 If, 
on the other hand, a country makes a charge for coinage, 
bullion will be worth in the market just so much less than 
coins containing the same amount of metal. 

Oftentimes, governments not only have made a charge 
for coinage, but have exacted more than is required to 
cover the cost of the operation ; such a charge 
is usually called seigniorage, 2 and is collected 
by withholding part of the bullion brought to the mint. 
In former centuries many of the sovereigns of Europe 
deliberately debased their coins by abstracting a seignior- 
age of from ten to ninety per cent. Modern countries 
usually debase the small pieces used for fractional cur- 
rency ; 3 but do this by purchasing metal upon government 
account and converting it into as many coins as it seems 
desirable to make. In the United States our so-called 
standard silver dollar has become a debased coin on ac- 
count of the progressive fall in the value of silver since 
1873, 4 and our fractional silver pieces contain still smaller 

1 That is, an ounce of fine gold will make two eagles, with a remainder 
of 67^ cents. Of standard gold, nine tenths fine, the eagle contains 258 
grains; and the mint price of standard gold is $i8.6o| per ounce. 

2 A charge which only covers the cost of coinage is called brassage. 

3 This prevents the melting up of such coins, since the metal they con- 
tain would be worth less than their face value. 

4 The silver dollar contains 371^ grains of fine silver. In 1873 this 
quantity of the white metal was worth $1,003 m g°ld; m I 9 11 it was 
worth $0,417. The half dollar contains not 185! grains of fine silver, but 
only 1731V Since 1878 the government has coined about $565,000,000 
dollars from silver purchased on its own account. 



METALLIC MONEY 121 

proportionate weights of fine metal than the standard 
dollar. It is highly important, as we shall learn, that a 
country's principal coins should not be debased; but it 
is convenient to debase the fractional currency in order to 
oblige persons who wish to melt or export money to select 
the larger pieces which, dollar for dollar, cost less to 
coin. 

After establishing public coinage systems, governments 
took the further step of declaring that their coins should 
be received by all persons in the payment of 

T 1 • • 111 ^^ tellder - 

debts. In this manner coins are made a legal 
tender, and must be accepted in discharge of all obligations 
unless by special contract some other medium of settle- 
ment has been agreed upon. Thus, in the United States, 
all our gold coins, the silver dollar, and the United States 
notes are declared a legal tender ; 1 but the courts will 
enforce contracts that call for payment in gold. 

§ 75. The belief is sometimes expressed that money 
originated by virtue of the action of governments, and is, 
consequently, purely a creature of the law. The "flat" 
This is the "fiat" theory. But the historical theory - 
fact is that a medium of exchange was established solely 
by the acts of individuals, and that governments, for a 
very long time, had nothing to do with its development. 
At a later date, governments instituted coinage systems, 
made their coins receivable at the public treasury, and 
finally declared them a legal tender for private debts. 

1 Fractional coins are a tender only for small sums, and national bank 
notes are not a legal tender. The United States issues gold and silver 
certificates against coined gold and silver actually deposited in the Treasury 
in exchange for them; these certificates, while everywhere acceptable, are 
not a legal tender. 



122 MONEY AND CREDIT 

Their action greatly extended the usefulness of money, but 
did not originate it. Money was at first a mere commodity 
which, on account of its superior desirability and conven- 
ience, obtained general currency as a medium of pay- 
ment. 

§ 76. When, however, a commodity began to circulate 
as money, it acquired a- new use, a peculiar property, 
conclusion: which thereafter distinguished it from all 
t^ns of n ° other commodities. Gradually, also, it ac- 
money. quired other functions. It came to serve as 

a value denominator, i.e., sl common denominator in 
which the exchange values of all other things are expressed. 
Obviously the process of exchange was greatly facilitated 
when, instead of having to remember all the ratios in which 
each one of a hundred commodities exchanged for each 
of the others, traders needed simply to keep informed 
concerning the hundred prices which such commodities 
would command when exchanged for money. Closely 
connected with this second function of money is a third, 
that of serving as a standard for deferred payments. In 
renting lands, or in agreements for loans secured by mort- 
gages, and in similar contracts, it is necessary to arrange 
for the payment of obligations at distant periods of time. 
Long-term contracts may extend for periods of ten, fifty, 
or one hundred years ; and it is highly important that the 
medium in which payments are made should be as stable 
as possible. For such purposes neither gold nor silver 
is a perfectly satisfactory standard, although the former 
is superior to the latter. In fact, it seems that no safe 
method of insuring ideal justice in deferred payments has 
yet been devised. 



CREDIT AND ITS INSTRUMENTS 123 

II. Credit and its Instruments 

§ 77. In addition to money, the world of business em- 
ploys various instruments of credit in effecting a consider- 
able proportion of its exchanges. Credit may Credit 
be defined as the power to obtain commodities deflned - 
or services at the present time in return for some equivalent 
promised at a future date. In such a country as the United 
States it is probable that about one half of all exchanges 
is eifected by means of instruments that evidence some 
sort of a credit transaction and serve as proof of the obli- 
gation of the debtor to make payment at some future 
time. 

§ 78. By means of book credits many exchanges are 
effected without the use of money. A may purchase $200 
of household supplies at a store kept by B, 

Book credits. 

while B receives $180 of farm produce from A. 
At the end of a quarter the whole series of transactions, 
aggregating $380, may be settled by the payment of the 
balance of $20 which is due to B. 

§ 79. A second instrument of credit, the promissory 
note, sometimes enables payments to be made without 
the employment of money. The payee, or the The pr0 mis- 
person to whom the note is due either upon sor y note - 
demand or at the end of a certain time, can indorse the 
note and thus make it payable to a third person to whom 
he may happen to owe money. In this manner, the 
promissory note, by successive indorsements, may have 
effected a number of exchanges before it is finally pre- 
sented for payment by the person who originally drew it. 

§ 80. A check is an order which a person draws upon 



124 MONEY AND CREDIT 

his banker, directing him to pay a certain sum to the ordei 

of the person to whom the check is payable, or to the 

bearer. Like a promissory note, it may pass, 

1116 C£16Ck. m 

by indorsements, through several hands ; and 
it may be the medium in which a number of payments are 
made before it finally reaches the banker upon whom it is 
drawn. But even when this does not happen, the use 
of checks makes it unnecessary to employ money. Let 
us assume that A owes B $50, that B owes C $50, and that 
C owes D $50, and let us also assume that the four men 
have deposits at the same bank. Then A, B, and C may 
draw checks for $50 payable to B, C, and D, respectively; 
and in due time B, C, and D will deposit at the bank the 
checks received from A, B, and C. Then the banker will 
deduct from the deposits of A, B, and C the amounts of the 
checks drawn by them, while he will credit B, C, and D 
with the amounts of the checks which they present. The 
net result will be that the deposit of A will be decreased 
by $50, the deposits of B and C will remain unchanged, 
and the deposit of D will be increased by $50. In this way, 
the three debts may be paid without the actual use of any 
money. 

If now the four men happen to keep their accounts 
with different banks, the checks will be settled between 
The clearing the four institutions. In cities of any consid- 
system. erable size this work is performed by clearing 

houses. The customers of each bank deposit with it the 
checks that they receive, and are credited with the sums 
thus represented; then, once a day, the bank sends to 
the clearing house checks drawn upon other institutions. 
There the bank finds representatives of other institutions 



CREDIT AND ITS INSTRUMENTS 125 

who are ready to present for settlement the checks drawn 
by its depositors. If one bank sends to the clearing house 
$100,000 of checks drawn upon other institutions, and 
finds there checks to the amount of $90,000 drawn upon 
itself, it will receive the balance of $10,000 that stands 
to its credit; if, on the other hand, the checks drawn on 
the bank had amounted to $110,000, a balance of $10,000 
would have been due to the clearing house. 

Banks located in different cities settle their mutual 
obligations with almost equal ease. Country banks have 
agents, or banks with which they correspond, 
in the nearest clearing-house city, so that every tion of bank 
clearing house settles accounts for a consider- 
able territory adjacent to it. Then, finally, the New York 
Clearing House acts as a central clearing station for the 
whole country, since every important city bank corre- 
sponds with some institution in New York City. 1 

§ 81. A bill of exchange, also called a draft, is a written 
order by which the person who draws the instrument directs 
a second person (the drawee) to pay a sum of Thebillof 
money to a third person (the payee), either at exchan s e - 
sight or after a certain time. Thus if A owes $100 to B, 
and B owes $100 to C, both debts can be canceled if B 
draws a bill ordering A to pay $100 to C ; while, by indorse- 
ment, C can use the instrument in settling a debt of $100 
owed to D. Bankers make a business of buying bills of 
exchange, and will sell to any debtor a bill of exchange 
with which he may settle an obligation due in a distant 

1 In 191 1 the total exchanges of all the clearing houses of the United 
States aggregated $159,373,450,000, of which the clearings at New York 
amounted to $92,420,120,000. 



126 MONEY AND CREDIT 

city. 1 In this way evidences of debt accumulate in the 
hands of bankers in various cities ; and the bills due, say 
from New York to Chicago, can be used to offset a similar 
amount of bills due from Chicago to New York. No 
money need be sent from one city to the other except in 
payment of whatever balances may be due upon the whole 
body of transactions. 

In domestic trade payment by checks has to a consider- 
able extent displaced the use of bills of exchange, which, 
Foreign bins fifty or sixty years ago, were the ordinary me- 
of exchange, dium f payment between distant places. In 
foreign dealings, however, the bill of exchange retains its 
importance; and foreign bills will require somewhat de- 
tailed study. In principle they are precisely like domestic 
bills. They are dealt in by private bankers and some of 
the larger incorporated banks. If New York has been 
buying more goods or securities from London than English- 
men have purchased in the United States, New York 
dealers in exchange will ' encounter a large demand for 
remittances to London and small offerings of bills drawn 
upon English creditors; while in London there will be 
heavy offerings of bills drawn against American debtors 
and a small demand for remittances to the United States. 
Such conditions make it probable that gold will have to be 
sent to England sooner or later, in order to settle the bal- 
ance due to that country ; and exchange will be said to be 
unfavorable to New York and favorable to London. 

1 When a creditor draws an order upon his debtor, the debt may be said 
to be "drawn for "; when the debtor buys a bill to remit to his creditor, the 
debt is " remitted for." This distinction is important because in practice 
the two classes of transactions are called by the same name, so that the 
beginner is often confused. 



CREDIT AND ITS INSTRUMENTS \2] 

Meanwhile, before any shipment of gold occurs, inter- 
esting developments will appear in the rate of exchange. 
The English pound sterling is worth $4,866 of The rate of 
our money; and if the debts due to England exchan g e - 
should precisely equal those due to the United States, 
bankers could settle all international obligations by the 
mere balancing of accounts without the shipment of money, 
and exchange would stand at par. 1 When, however, ex- 
change becomes unfavorable to New York on account of 
its English debts exceeding those which London owes in 
this country, dealers will raise the price of bills above 
$4,866. To a person who owes money in London they 
will not sell a draft at par, because of the prospect of having 
to ship gold in order to settle for all obligations that they 
incur for remittances to London. But they will pay more 
than $4,866 to any person who offers to sell them a bill 
drawn upon an English debtor, since every such bill can- 
cels an equivalent amount of indebtedness to their London 
correspondents, and reduces the balance that must be 
remitted in gold. For this reason exchange will rise 
above par when it becomes unfavorable to New York. 2 

There are limits, however, to a rise or fall in the rate of 
exchange. The cost of shipping gold across the ocean 
is, at the present time, not far from two cents for each 

1 This means that $4. 866 in New York would be worth the same as a 
pound in London. 

2 In a similar manner exchange falls below par when trade is running 
in favor of New York. Under such conditions, bills drawn upon English 
debtors are abundant and will command a lower price; while remittances 
to London can be purchased from the dealers at less than $4,866, since 
every such transaction cancels part of the balance which London owes 
New York, and reduces the shipments of money to the United States. 



128 MONEY AND CREDIT 

pound sterling; and this cost fixes certain bounds beyond 

which exchange cannot move, except under the most ex- 

. . x _ traordinary circumstances. If the rate rises 

Limits to the J 

fluctuation above S4.886, it becomes as cheap for any 

of the rate. . 

one to settle a London debt by shipping gold 
as by purchasing a bill of exchange; and, accordingly, 
when exchange rises to this figure, exports of gold may 
be expected. 1 On the other hand, the rate cannot fall 
below $4,846 without inviting imports of gold which put 
an end to the decline. Between these lower and upper 
limits, exchange fluctuates according to the conditions of 
international indebtedness. 

§ 82. Bank notes are a final form of credit instruments 
employed in facilitating exchanges. They are merely 
The bank promissory notes issued by a bank and made 
note - payable upon the demand of any holder. 

Since they circulate from hand to hand without indorse- 
ment, and are payable to the bearer without the require- 
ment of identification, they are far more effective as a 
medium of exchange than any of the other instruments of 
credit. 

III. The Laws of Money 

§ 83. The laws governing money now claim attention, 
and we may consider first of all the principle that deter- 

1 In point of fact shipments have taken place in recent years when the 
rate was considerably under $4.88. This happened in "triangular opera- 
tions," in which, when the rate of exchange on Paris was unfavorable to 
London, the gold which London shipped to France was drawn from New 
York. In these cases the small profit realized on a shipment from New 
York to London plus the profits derived from shipments from London to 
Paris has carried gold out of the United States when the rate of exchange 
was #4.871. 



THE LAWS OF MONEY 129 

mines its value. If gold were a mere commodity, its value 
would depend first upon its marginal utility as a con- 
sumer's good and ultimately upon its marginal The first 
cost of production. But it has acquired a tievXue 
peculiar function, that of serving as a medium of money, 
of exchange, and this fact complicates the forces by which 
its value is determined. 

Obviously the value of money will always be measured 
by the number of commodities that it will command, 
rising as this number increases, and decreas- Money and 
ing as it falls. This is another way of saying pnces - 
that, when prices are low and a given amount of money 
will command a large quantity of commodities, the value 
of the circulating medium is high ; and that, when prices 
are high and the purchasing power of money is small, its 
value is low. In other words the value of money varies 
inversely with the general level of prices. 

§ 84. It is a familiar fact of experience that the pur- 
chasing power of money, i.e., the general level of prices, 
varies materially from time to time. Between M 

J Changes in 

1850 and 1873 prices rose both in Europe and the level of 
in the United States; then, for a period of 
twenty-three years, they steadily fell, until, in 1897, 
another upward movement began. 1 As nearly as can be 

1 In measuring movements of prices, tables of index numbers are 
vsually employed. The average price of each one of a large number of 
commodities is ascertained for some year or period of years, and this is 
called 100 as a base for measuring subsequent movements. If one hundred 
commodities are examined, the index number of the first year will be 
10,000. Then the prices for each commodity for subsequent years are 
computed as percentages of the price of the basic year or years. Thus if, 
of the one hundred commodities, twenty rise ten per cent during the next 



130 MONEY AND CREDIT 

ascertained, the purchasing power of gold decreased about 
twenty per cent between 1850 and 1870, and it increased 
nearly forty per cent during the period that ended in 1897. 
Since 1897 the purchasing power of gold has declined by 
about thirty-five per cent. 

§ 85. Fluctuations in the value of money are to be 
attributed to the same factors that govern the value of 
The demand everything else — the forces of demand and 
for money. SU pply. All of the exchanges regularly effected 
through the agency of money 1 constitute the demand for 
money, a demand that is just as real as the demand for 
cotton or for wheat. Goods are produced, under modern 
conditions, for the purpose of being sold ; and all commod- 
ities in the market represent a demand for the medium of 
payment, whatever that may be. To a very considerable 
extent, this medium of payment is money; and it is evi- 
dent that when the number of exchanges, i.e., the volume 
of business, is large, the demand for money will increase; 
while if the volume of business declines, there will be a 
decrease in the demand for money. 

The supply of money depends upon the number of 
coins in circulation and the rapidity with which they pass 
The supply fr° m hand to hand. When trade is brisk, the 
of money. circulation of money becomes rapid, and the 
supply is really increased even though no change takes 
place in the number of coins; while in times when busi- 
ness is depressed, the movement slackens and the supply 

year, sixty remain unchanged in price, and twenty fall five per cent, the 
index number for the year will be 10,100, which will indicate an average 
rise of one per cent. 

1 In a subsequent paragraph we shall take account of the fact that many 
exchanges are effected by means of credit. 



THE LAWS OF MONEY 131 

is virtually decreased. Except for changes in the condi- 
tion of business, the rate of circulation depends upon the 
habits of the people and may be regarded as a fixed quan- 
tity ; so that if there is an increase or decrease in the num- 
ber of coins, it is safe to assume that the supply of money 
is increased or decreased, unless it can be shown that 
something has happened to retard or accelerate its 
circulation. 

If, now, we assume that the supply of money remains 
stationary, and that the volume of business in any com- 
munity increases, the value of money will rise on account 
of the increased demand for a medium of pay- Effects of 
ment; while if the volume of business declines, ^emamiand 
the value of money will fall. In the first case supply- 
the tendency will be toward lower prices; and, in the 
second, prices will tend to rise. But if the demand re- 
mains unchanged and the supply increases, the value of 
money must fall, which means, of course, that prices 
become higher. And, finally, if the supply of money is 
decreased, its value tends to rise, and prices will fall to a 
lower level. 

The actual operation of such changes is seen very clearly 
whenever there occurs a variation in the production of 
gold. For instance, in California in 1840, 

, . , . Illustrations. 

the new gold increased enormously the prices 
of shovels, pans, top-boots, blankets, bacon, and flour — 
the commodities needed in the mining camps; and then 
the gold found its way to the East in payment for miners' 
supplies purchased in the leading cities. Within five 
years the annual gold production of the United States ad- 
vanced from $1,000,000 to $60,000,000, and the rise of 



132 MONEY AND CREDIT 

prices became general as the supply of money steadily 
rose. 1 When, after 1870, the world's gold output began 
to decline, the rise of prices was checked ; and before long 
a downward movement set in. 2 This continued until 
recent years when the effect of improved methods of treat- 
ing ore and the development of the South African mines 
again enlarged the output, which has now reached propor- 
tions never before known. 3 

§ 86. We must now consider the relations that exist be- 
tween the stock of money and the quantity of the money 
Gold used metal used in the arts. As a consumption good, 
m the arts. t k e mar gi na } utility of gold depends simply upon 
its usefulness in the arts; as money, its marginal utility 
depends upon the general level of prices, i.e., its purchas- 
ing power. If free coinage is permitted, it is obvious 
that gold bullion will be converted into coin when the 
purchasing power of the metal is greater than its marginal 

1 The Californian and Australian gold discoveries increased the world's 
output prodigiously, as is shown in the following table, which gives the 
total production by decades : — 

1 831-1840 = $134,841,000 
1 841-1850 = $363,928,000 
1851-1860 = $1,332,981,000 

2 The world's total output decreased by decades, as follows : — 

1861-1870 = $1,263,015,000 
1871-1880 = $1,150,814,000 
1 881-1890 = $1,060,056,000 

Other forces, it should be remarked, were operating at the same time to 
cause a decline in prices. 

3 By five-year periods the production of gold was as follows : — 

1 886- 1 890 = $564,474,000 
1891-1895 = $814,736,000 
1 896- 1 900 = $1,286,487,000 
1906-1910 = $1,766,796,000 



THE LAWS OF MONEY 133 

utility as a consumption good; while coin will be melted 
up into bullion when the conditions are reversed. In this 
way, under free coinage, the marginal utility of gold tends 
to remain about the same, whether the metal is employed 
as money or used in the arts. 

§ 87. This brings us to the question whether the cost 
of producing gold has any effect upon its value; and it 
will be seen that, undoubtedly, such an influ- 

. ' Ji The cost of 

ence may come into play, although much more producing 
tardily than in the case of other commodities. 
When the purchasing power of gold is high, prices are 
low ; and, therefore, the cost of operating gold mines is con- 
siderably reduced, even though no improvements occur in 
the methods of production. The lower cost of operation 
increases the profits of the better mines, and makes it 
possible to work poorer mines that yield inferior grades 
of ore or can be operated only at a larger expense. Thus 
the output tends to increase, the supply of gold is enlarged, 
and more coins come into circulation, tending to raise 
prices and to reduce the purchasing power of money. 
This process is likely to continue until the higher prices 
increase the expense of operating the poorer mines suffi- 
ciently to put an end to their operation, and thus check 
the output of gold. In this manner, if a considerable 
period of time is taken into account, the marginal cost 
of producing gold, i.e., the cost at the poorest mines in 
use, influences the supply and hence the value of money. 
But the adjustment of the purchasing power of gold to 
the marginal cost of production can be brought about 
only after a sufficient number of years have elapsed to 
enable the changed conditions of output to influence 



f34 MONEY AND CREDIT 

materially the supply in existence. Thus, to take the 
latest example, the annual production of gold reached its 
lowest point between 1881 and 1885, when it averaged 
only $99,116,000 per year. From 1886 to 1890 the aver- 
age output rose slightly to $112,900,000, without affecting 
prices ; while from 1891 to 1895 it increased to $163,000,000 
without checking the decline of the index numbers. After 
that, however, as the production rose to an annual average 
of $257,000,000 for the next five years, a rise of prices 
began; and the purchasing power of gold is likely to 
show a continued decline as long as the output remains 
at its present figures, about $450,000,000 a year. 

§ ^>. It is now necessary to take into account the fact 
that perhaps one half of the whole volume of business 
The influence transactions is dispatched by means of vari- 
the C vaiue of ous instruments of credit. This fact has 
money. \ e ^ some writers to the conclusion that the 

growth of credit has invalidated the theory that the pur- 
chasing power of money depends on the conditions of 
supply and demand. And if the use of credit could be 
carried to any extent whatever, so that, in case the supply 
of money should greatly decrease, all exchanges could 
continue on the old basis simply by resorting to a larger 
supply of credit, the criticism of the accepted theory would 
be well founded. Money would have no effect on prices 
if it were not necessary for the transaction of the existing 
volume of business at the present level of values. 

But the employment of credit cannot be increased at 
will in order to prevent a change of prices. Book credits, 
promissory notes, and bills of exchange are now used 
about as extensively as business men find it convenient to 



THE LAWS OF MONEY 135 

employ them. A sudden currency famine might lead to 
a greater use of these and other devices for exchanging 
commodities without the use of money, but not The effect of 
to such an extent as to obviate all inconven- Jrom£iy S ' 
ience or prevent a sharp fall of prices. It is j^ 68 '/ 11 * 
not accident, but the extent to which they are exchange, 
found convenient, that limits the use of these instruments 
of credit. 

Bank notes and checks are employed in quantities that 
vary from year to year ; and it might seem, at first thought, 
that a deficiency of metallic money could be 

J J The effect of 

remedied easily enough by an increased em- banknotes 
ployment of these forms of bank credit. Un- 
fortunately, however, there are very definite limits beyond 
which bank notes and checks cannot be used without the 
most serious danger. The limits arise from the fact that 
both of these forms of bankers' obligations must be in- 
stantly convertible into cash if they are not to depreciate 
— a consideration which will require further treatment in 
subsequent pages. At all times bankers must maintain a 
reserve of ready money, which, according to circumstances, 
should be from five to thirty per cent of the amount of 
money owed to depositors and holders of notes. It ap- 
pears, therefore, that the employment of checks and bank 
notes is limited by the necessity of maintaining a specie 
reserve, so that there are bounds beyond which the use of 
these instruments cannot be carried without an increase 
of the supply of ready money. For this reason it is safe 
to conclude that there must always be a connection be- 
tween the amount of money in circulation and the extent 
to which credit can be employed. 



136 MONEY AND CREDIT 

§ 89. Full importance will be given to the part which 

credit plays in the exchange of commodities if we make a 

slight restatement of our theory. Book credits, 

Summary: as ° J 7 

to the value bills of exchange, and promissory notes suffice 

of money. . - . 

for many exchanges m which no money is 
used; and we may consider that their effect is to reduce, 
by so much, the demand for money. Bank notes and 
checks, on the other hand, call for the use of some money 
as a specie reserve, but they enable one dollar thus held by 
a banker to do the work of three or four dollars in actual 
circulation ; thus they increase the efficiency of a given 
stock of coin. Bearing these considerations in mind, we 
can formulate the following complete theory: The value 
of money depends upon the demand, as decreased by certain 
instruments of credit; and upon the supply, as increased 
by the heightened efficiency of those coins which are held as 
a reserve for the circulation 0} checks and bank notes. 
Ultimately, as we have seen, the cost of producing gold 
affects its value ; but this fact needs no further attention. 
§ 90. We now pass to a second principle relating to 
money, which is known as Gresham's law. As far back as 
The second the record extends, governments have continu- 
Gresham's a % tried experiments with debased money. By 
law - the side of specie they have forced paper into 

circulation ; they have gathered up coins of full weight and 
recoined them into lighter pieces ; or, when one metal had 
become the established medium of exchange and standard 
of value, they have issued money made of the other metal. 
In the last case the new coins have been given a certain 
nominal value in terms of the old, but changes in the 
market ratio of gold and silver have sooner or later made 



THE LAWS OF MONEY 1 37 

the metallic contents of the one kind of money less valu- 
able than the contents of an equal nominal amount of the 
other. From centuries of such experience economists 
have derived a law governing the operation of debased 
money, which has been named after Sir Thomas Gresham, 
in his day "the greatest merchant of London," who in 
the sixteenth century called to the attention of Queen 
Elizabeth the fact that "bad money drives out good." 

With other things the worse may be displaced by the 
better, since it is for the interest of consumers to buy the 
best that the market affords. Money, how- 

Illustrations. 

ever, is in demand, not as an object of per- 
sonal consumption, but as a medium for paying debts; 
and it is obviously for the interest of the debtor to employ 
the cheapest sort of coins that the law will permit him to 
offer his creditor. In the seventeenth century, when 
Massachusetts made public taxes payable in cattle, the 
taxpayers naturally turned over to the provincial treasury 
the poorest cattle in their pastures, until, in 1658, the 
Great and General Court was obliged to enact that no 
man should discharge the rates "with leane cattle." In 
the eighteenth century when North Carolina made seven- 
teen different commodities legal tender for debts, public 
and private, the governor of the province observed that it 
was "a stated rule that, of so many commodities, the 
worst sort only were paid." Illustrations of the truth of 
Gresham's principle might be multiplied, but the testi- 
mony of reason and experience is so uniform that it is 
unnecessary to dwell longer upon the subject. 

The operation of Gresham's law does not depend, under 
modern conditions, upon the action of the mass of the 



138 MONEY AND CREDIT 

people in picking over the various coins in order to elect 

the cheapest medium for the payment of debts. The 

work is done far more promptly and quietly 

Method in r r J . 

which the by bankers, money dealers, and goldsmiths, 
aw opera es. w k ose k us i ness CO mpels them to note the 

smallest differences in the bullion value of coins. A gold- 
smith will select only new gold eagles that have lost none 
of their weight through abrasion, when he places money 
in the melting pot ; and a banker will select the same sort 
of pieces when he exports gold to England, where it must 
pass as so much bullion. Thus lighter coins remain in 
domestic channels of circulation, and heavier money dis- 
appears. So, too, if an unlimited quantity of inferior 
silver coins or paper money should be forced upon the 
country, it would be chiefly the bankers, money changers, 
and goldsmiths into whose coffers our gold would dis- 
appear. 

§ 91. But there are certain limits to the power of in- 
ferior money to drive out superior. At the present mo- 
ment something more than $1,7^0,000,000 of 

Limitations 5 . '/^ ' ' 

on the action gold is supposed to circulate in the United 
States, or to be held in bank reserves and the 
federal treasury. Yet by the side of this standard money 
circulate $350,000,000 of paper issued by the govern- 
ment, and silver to the nominal amount of $724,000,000 
which, if put into the melting pot, would be worth only 
40 cents on the dollar. How, indeed, are these facts to be 
reconciled with our law that cheap money drives out 
dearer ? 

The difficulty is cleared up when the law is modified so 
as to read * Cheaper money drives out oj circulation a sub- 



THE LAWS OF MONEY 1 39 

stantially equivalent amount of dearer money. The reason 
for such a limitation of the principle is not hard to 
explain. The present volume of business in the The law 
United States could not be transacted at the restated - 
present level of prices without about as many dollars of all 
kinds as are now in circulation. If a large part of our 
present supply of gold should leave the country, prices 
would fall to a marked degree unless an equivalent amount 
of paper and silver were added to the currency. Such a 
fall in prices would cheapen commodities so greatly that 
gold would flow back into the country in order to purchase 
various products on the favorable terms that would be 
offered. Our present supply of gold, therefore, is in no 
danger of leaving the country if we see to it that no addi- 
tion is made to the stock of paper and debased silver now 
in circulation. The debased money already issued has, 
undoubtedly, driven out an equivalent quantity of gold, 
or, what is the same thing, has prevented it from coming 
to us. But it cannot drive out all of the gold because its 
supply is limited to a quantity that is not sufficient to 
carry on the business of the country except at abnormally 
low prices that would attract the yellow metal back to our 
markets. Bad money, then, displaces an approximately 
similar amount of good money, but no more. 

Indeed, if a country which originally had no money but 
gold should issue paper or debased silver up to 80 or 90 per 
cent of its total circulation, 10 or 20 per cent of 

7 m r Additional 

its former gold supply would remain in its accus- considera- 
tomed place if all the other factors in the situa- 
tion were unchanged. In strict theory it might be possible 
to issue debased money to the extent of 99 per cent of the 



140 MONEY AND CREDIT 

gold supply without driving the remaining fraction of the 
yellow metal out of circulation or raising prices. Gener- 
ally, however, the threat of a large issue of debased cur- 
rency has the effect of checking business activity and so 
of reducing the demand for money. If the demand de- 
clines by 20 per cent, then all gold would be driven out of 
circulation after silver or paper had been issued to the 
extent of 80 per cent of the former money supply. This 
fact, moreover, is usually overlooked whenever a country 
begins to revel in the delights of a plentiful supply of cheap 
money ; it is, indeed, one of the chief things to be appre- 
hended when the process of tinkering with a sound 
currency begins. 

§ 92. Our third principle is the law governing the ter- 
ritorial distribution of the precious metals. Gold and 
The third silver are not produced in material quantities 
territorial * n au " countries; in fact, production is local- 
distribution j ze j j n a f ew re onons that are noted for their 

of precious ° 

metals. large output. And yet, in proportion to their 

needs, all countries seem to be supplied tolerably well 
with gold, or silver, as they prefer. Evidently there must 
be some process by which this uniform distribution of the 
annual output is carried on. 

The process is nothing else than international exchange. 
If it ever happens that the purchasing power of the metal 
Th in any country is materially higher than in 

governing the others, gold inevitably flows to that place where 

distribution. . 1 . ' ' . . ■, f 

its value is greatest. This is another way of 
saying that low prices attract gold away from regions 
where prices are higher. In countries where there is a 
large output of the precious metals, the purchasing power 



THE LAWS OF MONEY 141 

of gold would be greatly reduced if none of the annual 
product was exported to lands that are without important 
mines. Differences in general levels of prices, therefore, 
are the motive power that forces the constant outflow of 
gold from the regions where the principal mines are found. 
§ 93. The position of a gold-producing country is well 
illustrated by the experience of the United States. Prior 
to the Californian discoveries in 1848, this 



Position of 

country produced an insignificant quantity of goidproduc- 
gold and silver, and was obliged to depend on 
its foreign trade to bring in an adequate supply of the 
precious metals. From 182 1, when the reported statistics 
begin, down to 1850, when the gold production suddenly 
rose to enormous proportions, imports of gold and silver 
into the United States exceeded exports by $70,000,000. In 
185 1, however, the pendulum swung in the other direc- 
tion, and the net exports were not less than $24,000,000. 
During the decade from 1851 to i860 the exports of 
specie exceeded imports by the enormous sum of 
$417,608,000, which was nearly three quarters of the 
total output of the mines ; and since that time the United 
States has been normally a specie-exporting country. 1 No 
other result could have been expected. 

§ 94. Other causes sometimes influence the movements 
of specie, as we shall learn in a later chapter; but the 
principal factor is the tendency of gold to seek the market 

1 From 1878 to 1883, and from 1897 to 1908, gold imports largely ex- 
ceeded exports. Both conditions were due to unusual developments of 
our foreign trade. The last gold import movement seems now to have 
reached its end. As long as the United States continues to produce 
$80,000,000 to $90,000,000 of gold, it is likely to remain, normally, a 
gold-exporting country. 



142 MONEY AND CREDIT 

where prices are lowest. The gold movement is auto- 

matic, regulating itself according to the needs of business, 

unless cheaper money is issued to cause a seri- 

Conclusion. x J 

ous displacement. If gold exports are not due 
to the action of Gresham's law, they will cease automat- 
ically as soon as the flow of money from the country 
lowers prices to about the level that prevails elsewhere; 
while an inflow will not continue after it has raised prices 
enough to make the purchasing power of gold no higher 
than it is in other places. Every nation that does not 
meddle with inferior substitutes must receive from its 
mines or its trade enough gold to enable it to transact its 
business at a general level of prices substantially similar 
to that which rules in the rest of the world; while more 
than this amount it cannot permanently retain. 

FOR SUPPLEMENTARY STUDY 

General: Bullock, Selected Readings in Economics, 387-405; 
Hadley, Economics, 180-207, 232-241; Nicholson, Polit- 
ical Economy, II, 88-124, 131-139; Seager, Introduction 
to Economics, 302-310; Taussig, Principles of Economics, Bk. 
III. 

Special: Jevons, Money and the Mechanism of Exchange, 3-85, 
187-191 ; Kinley, Money; White, Money and Banking, 
41-59, 217-255. 



CHAPTER VIII 

PROBLEMS OF MONEY AND BANKING 
I. Government Paper Money 

§ 95. Many countries have tried disastrous experi- 
ments with government paper money, which consists of 
circulating notes issued by governmental au- Government 
thority. These notes usually bear on their paper - 
face the promise of the government to redeem them, gen- 
erally at no specified time; they are receivable for taxes 
and other dues at the public treasury; and commonly 
are declared a legal tender for all private debts. While 
frequently a paper currency has been received willingly 
enough when first issued, the coercion of a legal tender 
law has usually been employed to maintain the credit of 
such currency; and the longer the issues continue, the 
more the element of forced circulation comes to the front. 

§ 96. The advocates of government paper have usually 
argued that paper money is cheaper than specie since, by 
its use, a country saves the expense of procur- Arguments in 
ing and maintaining a large stock of the pre- J*® ^^1 
cious metals. This is undoubtedly true, but it ness - 
is a matter of no consequence if experience has shown that 
paper currency is an unsafe medium of exchange. Then, 
too, in any case, specie must be employed in foreign ex- 
changes since one nation will not accept paper issued in 
another. 

H3 



144 PROBLEMS OF MONEY AND BANKING 

But it is claimed that a paper currency can be employed 
with perfect safety and convenience, provided that meas- 
ures are adopted to prevent its being issued in 

(<5) Safety. 

excess of the needs of trade. This, again, is 
entirely true; and it would be a highly important consid- 
eration if it were possible to devise some perfectly safe 
method of restricting the issue of paper. If a community 
is using $1,000,000 of specie in transacting its exchanges, 
the government might issue about $1,000,000 of paper 
without inflating prices and causing depreciation, provided 
that this was done in such a way as to assure business 
men that the new currency would not be increased beyond 
that limit. But such assurance it is impossible to give. 
Advocates of paper money have exhausted their ingenuity 
in devising automatic methods of limiting the issue; but 
most of these have been tried at some time or other, and 
found wanting. Even if a satisfactory restriction could 
be invented, there would be no guarantee that the legis- 
lature would not repeal or amend the law if it ever desired 
to increase the volume of the currency. 

The least intelligent argument in favor of a paper 
medium is that any kind of money depends for its exist- 
ence solely on the action of government in 

(c) Fiatism. .... . , . . . . rT ^ T 

issuing it and making it a legal tender. There- 
fore, it is said, the government can make one thing a 
dollar as well as another, and should select that medium 
which is cheapest. Our study of the development of 
metallic money has already demonstrated the falsity of 
the belief that it depends for its value solely upon the fiat 
of any government. Undoubtedly the fact that gold is 
employed as money increases its value by opening a new 



GOVERNMENT PAPER MONEY 145 

use for that metal, but it was a useful commodity before 
it ever became a medium of exchange; moreover, it was 
by the action of individuals, not that of governments, 
that gold was gradually preferred to other commodities 
for monetary purposes. Governments may declare that 
a piece of paper shall circulate as a dollar, and may force 
such money upon creditors who are bound by past con- 
tracts; but the new unit of value will be a paper dollar 
after all, not a gold dollar. Whether the paper currency 
will be as good as the gold depends on the amount of it 
which the government tries to place in circulation. 

§ 97. Although we have admitted that paper might 
answer the purposes of money in domestic exchange, pro- 
vided that its supply is held within proper 
bounds, the concession weakens in no way the against gov- 
case against government issues ; for the chances pap? r e : nt 
are that a limitation cannot be maintained. (ganger of 

overissue. 

In the first place, if the currency is emitted in 
order to defray public expenses, — and this is the way 
in which issues generally begin, — the real or supposed 
needs of the treasury are likely to lead to repeated emis- 
sions. It is far easier to set a printing press at work than 
to levy taxes for the support of a government, and this 
consideration will weigh heavily with a legislature anxious 
to please its constituents. Then, too, in time of war 
public expenditures are almost certain to exceed estimates 
and to furnish plausible excuses for additional issues of 
paper. Our Continental Congress began by emitting 
$3,000,000 of bills of credit, and finally placed $241,000,000 
in circulation. In time of peace it may be proposed to 
issue paper in order to construct useful public works, as 



146 PROBLEMS OF MONEY AND BANKING 

roads; in fact the advocates of such money never lack 
reasons for setting the printing presses at work. 

In a popular government a second factor operates with 

unpleasant force and frequency in favor of enlarging a 

paper currency. In all countries there are 

of debtor large numbers of men who have borrowed 

1*1 ace ac 

money, and will be materially benefited by 
any measure that lowers the value of the medium in which 
repayment must be made. This is particularly true of the 
United States, since in all the newly settled districts land 
is purchased, buildings are erected, and extensive improve- 
ments undertaken by means of money borrowed in the 
older and wealthier states. It has happened repeatedly 
that legislative bodies have been controlled by the debtor 
classes who have clamored for relief from the pressure of 
their debts. In national politics the same influences have 
given rise to demands for "more money" with which to 
pay debts, and in this way the national credit has been 
impaired and the stability of our monetary system threat- 
ened. From 1690 down to recent times, our country has 
been trying repeated experiments with cheap money, which, 
in almost every generation, have caused as much financial 
loss as a destructive war. Experience should incline us 
to extreme skepticism concerning the efficacy of any plan 
for limiting the issue of cheap paper. 

§ 98. Whenever government issues are employed, the 
paper begins to displace specie, although gold will not 
inflati n * wn °lly disappear until there is enough of the 
the united cheaper medium to take its place. When this 

States. .11 1 1 r i . 

point has been reached, further issues will 
cause a rise of prices, i.e., a paper dollar will begin to com- 



GOVERNMENT PAPER MONEY 147 

mand fewer commodities; while, the purchasing power 
of specie remaining unchanged, a difference will appear 
between the value of paper and that of gold. 1 The 
premium on gold will increase so long as the inflation 
continues; and prices will continue to rise until they 
finally reach enormous figures. Since the paper currency 
costs practically nothing, it may be issued, despite the de- 
preciation, until, as in our War for Independence, a 
bushel of money will hardly purchase a suit of clothes. 
When this point is reached, the currency becomes practi- 
cally worthless and inflation will stop ; but this is the only 
limit to the depreciation. Obviously, debtors can ex- 
tinguish a large number of debts with Very little trouble 
under such conditions as have been described. By 1779 
and 1780 our Continental issues had rendered thousands 
of people penniless, and had almost destroyed the last 
vestige of faith between man and man. "Old debts were 
paid when the paper money was more than seventy for 
one. Brothers defrauded brothers, children parents, and 
parents children. Widows, orphans, and others were 
paid, for money lent in specie, with depreciated paper, 
which they were compelled to receive. " 

And yet this carnival of fraud took place in spite of the 
fact that the various colonies had, between 1690 and 1764, 
tried many disastrous experiments with paper T he green- 
money. The bitter lessons taught by the backs - 
Continental currency were sufficient to make all honest 
men abhor the very name of bills of credit; but such 

1 This is called a premium on gold. During our Civil War the pre- 
mium on gold rose at one time to 185. This meant that $285 in papei 
was needed to purchase #100 in gold. 



148 PROBLEMS OF MONEY AND BANKING 

memories had died out when, in 1862, our national 
government issued $150,000,000 of greenbacks, which were 
soon increased to $450,000,000. This time the fortunate 
turn of military operations, rather than any wisdom on the 
part of Congress, confined the issues to a volume that was 
not large enough to cause such enormous depreciation as 
occurred during the Revolution. Yet in 1864 the green- 
backs were worth, on the average, less than 50 per cent of 
their nominal value, so that the country suffered from the 
evils of a depreciated currency. In 1879 tne government 
began to redeem the notes in coin, having accumulated a 
reserve of $133,000,000 of specie; and since then green- 
backs have been instantly convertible into gold at the 
demand of the holder. Unfortunately, however, an un* 
wise law passed in 1878 prevents the treasury from 
destroying a note after it has been redeemed, so that, by 
being reissued in any payments that the government 
makes, the greenbacks continue to circulate. 1 

§ 99. The present law, enacted in 1900, provides that 
a gold reserve of $150,000,000 shall be maintained in 
our present order to insure prompt redemption of the 
position. greenbacks; but it does not require them to 
be destroyed when drawn into the treasury in this man- 
ner. On the contrary, it prescribes a method by which 
they may be reissued, with the result that the greenbacks 
are still looked upon as a part of our currency system. 
From 1890 to 1894 demands for the redemption of enor- 

1 As a result of the law of 1878, the greenbacks left in circulation 
amount to $346,681,000. Since 1879 the government has redeemed in 
gold more than $735,000,000 of the notes, without reducing the quantity 
outstanding. 



BANKS AS INSTITUTIONS OF CREDIT 149 

mous quantities of the greenbacks forced the government 
into dire straits; but various events have improved the 
situation so that there is little reason to apprehend serious 
danger in times of peace. The objection to them now is 
chiefly that they would serve as a precedent for new issues 
in case the United States should ever be involved in a 
serious war. It would be far better to have the greenbacks 
retired by some gradual method, in order that we may not 
countenance even the limited employment of such a dan- 
gerous agency as government paper money. 

II. Banks as Institutions of Credit 

§ 100. It is now in order to study with some care the 
part played by banks in facilitating the commerce of the 
world. After considering the various func- The deposit 
tions exercised by the banker, we shall exam- functlon - 
ine briefly the manner in which this important business is 
organized in the United States. A bank has been defined 
tersely as "a manufactory of credit and a machine of 
exchange." In fulfilling its functions it endeavors, first 
of all, to establish its credit upon such a sound basis as to 
attract deposits of the surplus cash of the community 
which individuals do not care to carry in their pockets 
and business concerns wish to place elsewhere than in the 
money drawer. The large corporations of modern times 
have to keep millions of dollars in bank in order to insure 
prompt payment of running expenses, while even the pro- 
prietor of a small store prefers to deposit in a bank all of 
each day's receipts that are not needed in "making change." 
Competition between banks frequently leads to the offer 
of interest, generally at the rate of two per cent, upon de- 



150 PROBLEMS OF MONEY AND BANKING 

posits of considerable size ; but even when interest is not 
paid, the convenience of the check system is sufficient to 
attract a large body of depositors. 

§ 101. Over three hundred years ago, bankers found that 
not more than a certain proportion of their deposits was ever 
The function called for at any one time ; and they perceived 
of discount, fa^ ft womc i b e perfectly safe to lend at interest 
a considerable part of the money intrusted to their keeping. 
To this depositors would not object, provided that a suffi- 
cient reserve of cash was kept on hand to meet all their 
demands from day to day; because, by investing the 
funds, bankers could afford to receive deposits without 
making any charge for keeping them in a place of safety. 
In this manner banks now gather up the surplus cash of 
a community, and lend it out to persons who desire to 
borrow. Usually the borrowers are men who are en- 
gaged in successful business enterprises, and who desire to 
obtain capital with which to extend them. They offer to 
the banker their notes of hand, secured by responsible 
indorsers or by the deposit of collateral ; 1 or else they 
present bills of exchange representing commercial trans- 
actions from which the returns are not yet available. 2 
Such notes and bills are bought by the banker at a stipu- 
lated rate of discount, and thus become his property. By 
studying their customers carefully and watching the course 
of business, banks can make commercial paper an ex- 
tremely safe sort of investment. 

1 Stocks and bonds of corporations are the usual collateral, the banker 
accepting them as security for a loan to the amount of from 60 to 90 per 
cent of their market quotations, according to the stability of their value. 

2 Thus a merchant who sells goods upon thirty days' credit can draw 
apon his customer and discount the bill at his bank. 



BANKS AS INSTITUTIONS OF CREDIT 151 

§ 102. Deposit and discount are the essential functions 
that an institution must exercise in order to be a bank, but 
other functions may be added. Of these, the The issue 
one that has received the most attention is that of notes - 
of issuing circulating notes payable on demand. Since 
bank notes circulate readily from hand to hand, they are 
of considerable use to the business of a community in 
which few persons keep deposits at a bank and use checks 
in making payments; in large cities, however, the check 
is the more convenient medium of exchange. In all 
countries it has been found necessary to regulate by law 
the issue of circulating notes by banking institutions. 

§ 103. The operations of a bank will be most easily 
described by means of a simple illustration. Suppose 
that a banking corporation begins business with 
a capital of $so,ooo, and that it immediately re- operations 

. i . , P ^ rm illustrated. 

ceives deposits to the amount of $100,000. I he 
capital, it should be observed, serves as a guarantee for 
the safety of the depositors' money ; for if bad investments 
are made, resulting in a loss, the creditors of a company 
can lose nothing until the entire capital is wiped out. At 
this stage of its operations, the balance sheet of the bank 
would stand as follows : — 



Liabilities 
Capital stock ... $ 50,000 
Deposits 100,000 



$150,000 



Resources 
Office fixtures . . . $ 5,000 * 

Cash 145,000 

$150,000 



We will now suppose that the company lends to various 
persons $100,000 for ninety days at six per cent interest. 

1 We will assume that the company rents its offices, and invests $5000 
'« furniture, fixtures, and supplies. 



152 PROBLEMS OF MONEY AND BANKING 

These borrowers have accounts at the bank, and wish 
to have the funds which they borrow available for with- 
drawal by the usual method — by check. Accordingly 
the company will deduct $1500 for interest, 1 and credit 
the borrowers with deposits to the amount of $98,500, 
When this is done, the balance sheet of the bank will 
stand as follows : — 

Liabilities 

Capital $ 50,000 

Depositors .... 198,500 

Profits 2 1,500 



$250,000 



Resources 

Fixtures $ 5,000 

Cash 145,000 

Loans and discounts . 100,000 



$250,000 



By this transaction, it will be observed, the bank has 
increased its liabilities to depositors by $98,500; as an 
offset, it now owns $100,000 of promissory notes or bills of 
exchange, classed as loans and discounts, which at the end 
of three months will not only cancel such obligations, but 
also leave a profit of $1500. Whenever loans are made, 
the effect is to increase a bank's deposits, since most of 
the borrowers will be depositors and will desire to draw 
out their money more or less gradually by check. De- 
posits originating in this way are precisely like the $100,000 
of liabilities due to persons who deposited cash in the bank, 
except for the fact that they are obtained by giving promis- 
sory notes instead of turning over cash. Let us now 
suppose that depositors draw checks to the amount of 
$50,000 in order to effect various payments. After the 

1 Except with call loans, which are payable on demand, or call, banks 
regularly deduct interest in advance. 

2 The profits must be accounted for until they are distributed to stock- 
holders. 



BANKS AS INSTITUTIONS OF CRELIT 



153 



checks have been paid, the accounts of the bank will show 
the following changes : — 

Resources 

Fixtures $ 5,000 

95,000 
100,000 



Liabilities 

Capital % 50,000 

Deposits 148,500 

Profits i>5oo 



$200,000 



Cash 

Loans and discounts 



$200,000 



The bank now holds $95,000 of cash against $148,500 
of deposits, a reserve equal to nearly sixty-four per cent of 
these demand liabilities. Experience has shown „ , . 

1 Banking 

that, under ordinary conditions, a reserve of operations 

r r . {continued). 

from fifteen to twenty-five per cent is ample to 
provide for all demands that depositors will make at any 
one time. Accordingly the bank will endeavor to enlarge 
its loans, since the liabilities can be safely increased ; while 
the profits, of course, depend upon the amount of such 
business that can be done. It therefore lends $100,000 
upon the same terms as before, its balance sheet then 
standing as follows : — 



Liabilities 



Capital 

Deposits 

Profits 



$ 50,000 

247,000 

3,000 



$300,000 



Resources 

Fixtures $ 5,000 

Cash 95,000 

Loans and discounts . 200,000 



$300,000 



The cash reserve being still nearly forty per cent of its 
liabilities, the bank invests $10,000 in the purchase of 
various securities, the stocks or bonds of some prosperous 
corporation. If, now, shortly after this, depositors with- 
draw $40,000, the condition of the institution will be as 
follows : — 



*54 PROBLEMS OF MONEY AND BANKING 



Liabilities 

Capital $ 50,000 

Deposits 207,000 

Profits 3,000 



$260,000 



Resources 

Fixtures $ 5,000 

Cash 45,000 

Securities .... 
Loans and discounts 



10,000 
200,000 

$260,000 



The cash reserve is now less than twenty-five per cent of 
the deposits; but $10,000 can be added to it upon short 
notice by merely selling the securities which the bank 
holds. 

It now remains to study one other operation, the issue 
of notes. Let us assume that the bank is allowed to issue 

circulating notes with perfect freedom, as no 
operations bank in the United States has been permitted 

to do for more than forty years ; and assume, 
also, that the occasion for the issue is the demand of the 
depositors for $40,000 of ready money. If the persons who 
present the checks drawn by the depositors are willing to 
accept $40,000 of bank notes in payment of their claims 
against the bank, then the balance sheet will stand : — 



Liabilities 

Capital $ 50,000 

Deposits 167,000 

Notes 40,000 

Profits 3,000 



$260,000 



Resources 

Fixtures $ 5,000 

Cash ...... 45,000 

Securities 10,000 

Loans and discounts . 200,000 



$260,000 



Obviously this transaction has not increased the aggre- 
gate demand liabilities of the bank, but has merely sub- 
stituted a liability of $40,000 to noteholders for one of 
$40,000 to depositors. It has, however, had one very 
important result. If the checks drawn by depositors had 



BANKS AS INSTITUTIONS OF CREDIT 155 

been paid in cash, the specie held by the bank would have 
been drawn down to $5000, a dangerously low point. 
The bank could have increased its cash by selling its 
$10,000 of securities, but even this would have given a 
reserve of less than ten per cent of the $167,000 due to 
depositors. Under such conditions the institution could 
not have loaned any more money to its customary borrow- 
ers and would have had to curtail its operations until the 
gradual maturing of some of the $200,000 of discounted 
paper had increased its cash to safe proportions. As it 
is, however, by issuing notes the cash reserve is kept 
unchanged ; and the bank will not need to curtail its loans. 
§ 104. In the United States only three banks were in ex- 
istence when the Constitution went into effect in 1789; but 
soon after that the various states began to grant state bank- 
charters to numerous banking companies, and united** 16 
these institutions multiplied at a rapid rate. states - 
Many of the early banks were conducted with the greatest 
recklessness and dishonesty, and their creditors suffered 
enormous losses. In 1814, 1837, and 1857 there occurred 
general suspensions of specie payments by most of the banks 
in the country. Since deposit banking was less developed 
than it is to-day, the banks employed their credit by issu- 
ing huge quantities of notes, — frequently without any 
intention of redeeming them. Notes often circulated long 
after banks had gone out of existence; and every man 
who did not wish to lose money was obliged to consult 
bank-note detectors in order to ascertain whether the bills 
offered him were issued by institutions that would redeem 
their notes on demand. In the course of time some of 
the older and more conservative states adopted stringent 



156 PROBLEMS OF MONEY AND BANKING 

laws to check these abuses, and gradually established 
sound systems of banking. Yet in i860 there were prac- 
tically no convertible bank notes in the Mississippi Valley 
north of Louisiana, while the notes of dead or doubtful 
banks were hawked about at a discount varying from ten 
to ninety per cent. 

§ 105. The country was wedded, however, to its system 

of state banks; and our national banking system would 

not have been established when it was if it had 

The national 

banking not been for conditions created by the Civil War. 
Into these we need not enter; suffice it to say 
that in 1863 and 1864 Congress passed laws under which 
our national banks were established. At the present time 
the principal provisions of the federal laws are as follows : 

1. A Comptroller of the Currency is placed in charge 
of the administration of the banking laws. Each bank is 
required to report its condition to him five times annually, 
and examiners are appointed to examine the affairs of 
each institution. 

2. Each national bank must have a capital of not less 
than $25,000, and stockholders are liable for the debts of 
the bank to double the par value of their stock. 

3. A certain proportion of the capital of each bank 
must be invested in registered interest-bearing bonds of 
the United States deposited in the national Treasury. 

4. On the security of these bonds, a bank may issue 
notes to an amount not exceeding the par value of the 
bonds; but the Comptroller may require additional secu- 
rity if the bonds ever fall below par. 

5. These notes are not legal tender, but are receivable 



BANKS AS INSTITUTIONS OF CREDIT 157 

for taxes, except for duties on imports, and are receivable 
for payments to any national bank. Each bank must 
redeem its notes on demand in legal-tender money. 

6. Banks must deposit in the Treasury a fund equal to 
five per cent of their outstanding circulation. Thus the 
United States undertakes to redeem notes presented at 
the Treasury; and would do so even if the fund proved 
insufficient, having adequate security in the bonds and in 
a first lien upon the assets of a bank. Consequently the 
notes are practically guaranteed by the government. 

7. Each bank must keep a reserve of lawful money. In 
smaller cities a reserve of fifteen per cent of the deposits 
is required. In the "reserve cities" a reserve of twenty- 
five per cent is necessary. Banks in smaller cities may 
deposit sixty per cent of their reserves with banks in re- 
serve cities. Banks of reserve cities may deposit fifty 
per cent of their reserves with banks in " central reserve 
cities," that is, in New York, Chicago, and St. Louis. 

8. Banks are taxed one half of one per cent on their 
circulation. The notes formerly issued by state banks 
have been put out of existence by a tax of ten per cent, 
which made such issues unprofitable. 

Under these laws an admirably sound banking system 
has been developed, and the losses and inconveniences 
suffered prior to i860 have become a thing of The present 
the past. In recent years state banking insti- Sltuatl0n - 
tutions have increased in numbers, although they are not 
allowed to issue notes; and trust companies, which were 
established originally for the purpose of acting as trustees 
of estates and executing similar trusts, have entered the 
field of deposit and discount banking. Yet the national 



158 PROBLEMS OF MONEY AND BANKING 

banks retain a position of preponderance, and will prob- 
ably continue to do so, even though some of them chafe 
under the restrictions which the law imposes. If any 
change is affected in the system, it is likely to be in the 
conditions under which notes are issued, but a discussion 
of this matter would carry us too far afield. 

III. Bimetallism 

§ 1 06. Prior to the nineteenth century many countries 
had permitted the free coinage of both gold and silver at 
National ratios varying from about fifteen to fifteen and 
bimetallism. a hal f gra i ns f s ii ver f or e2iC h grain of gold 

contained in their coins. The result was that, as often 
as the market value of one metal or the other changed, 
Gresham's law came into operation, and the coins that 
were overvalued drove the others out of circulation. 

In the United States, for instance, our first coinage system, 
established in 1792, provided for the free coinage of a sil- 
The experi- ver dollar containing 371.25 grains of fine metal 
united e an< ^ a g°ld eagle with fine contents of 247.5 
states. grains. This established a proportionate valua- 

tion of fifteen to one, 1 which was approximately the correct 
market ratio at the time the law was passed; but very 
soon silver fell in value, so that 15.61 grains were required 
in the bullion market to purchase one grain of gold. The 
result was that gold could not circulate by the side of sil- 
ver coins valued at the ratio established in 1792, and the 
country was thrown on a silver basis. In 1834 and 1837 

1 Since the eagle weighed 247.5 grains, the law rated 24.75 grains of 
fine gold as equivalent to 371.25 grains of silver. This gives the ratio of 
fifteen to one. 



BIMETALLISM 1 5 g 

Congress cut down the contents of the eagle to 232.2 
grains in order to bring gold back into circulation. This 
action established a ratio of 15.988 to 1 — known ever since 
as sixteen to one — by which silver was slightly under- 
valued, and gold was enabled gradually to displace it. 
The Californian discoveries had the effect of lowering 
still farther the value of gold; so that, in 1853, the silver 
contained in a dollar was worth $1.04, and the coin had 
gone wholly out of use. Thus our currency was placed 
upon a gold basis, and remained there until the issue of 
greenbacks in 1862 introduced an era of depreciated paper 
money. 

§ 107. In 1816 England had debased her silver coins, 
made them legal tender only for small payments, and 
established gold as the sole standard of value. G oiamono- 
This movement toward gold monometallism metallism - 
was greatly accelerated when, in 187 1 and 1873, the newl} 
formed German Empire established a national gold coin- 
age, and withdrew most of the silver coins that had for- 
merly circulated in the various German states. At about 
the same time the United States, with a view to the future 
resumption of specie payments, began to revise its coinage 
laws; and in 1873 finally dropped from its list of author- 
ized coins the obsolete silver dollar which was still worth 
more than the gold dollar. This action put an end to the 
free coinage of silver, and by it that metal is said to have 
been "demonetized." The law of 1873 was passed for 
the purpose, repeatedly expressed in Congress, of making 
gold the sole standard of value when specie payments 
should be resumed; yet it has been charged, wrongly, 
that the measure was enacted "secretly" or "inadvert- 



160 PROBLEMS OF MONEY AND BANKING 

ently" or even "fraudulently." The fact is that no one 
was interested in the fate of a silver dollar that was worth 
$1.02 in gold, and that no interest would have been mani- 
fested in it subsequently if the depreciation of silver had 
not made it cheaper than our standard gold coins. 

§ 108. Meanwhile France, Italy, and some smaller 
countries had organized the Latin Monetary Union, and 
_ : ;. established the free coinage of both silver and 

The Latin ° 

Monetary gold at a ratio of 15.5 to i. The large produc- 
tion of gold in California and Australia had long 
kept the value of that metal so low that it had flowed in 
large quantities to the French mints; but after 1870 the 
output of silver was enormously increased, and its value in 
turn declined. The result was that silver began to flow in 
excessive quantities to the mints of the Latin Union, so 
that it became necessary to restrict the coinage of that 
metal; in 1876, indeed, when the ratio had become 17.75 
to 1, the French mints were closed to silver. 

§ 109. Since 1876 all changes in the monetary situation 

have tended toward the general adoption of a single gold 

standard and the relegation of silver to a place 

Supremacy ° r 

of the gold as subsidiary currency. Austria and Russia 
have endeavored to free themselves from de- 
preciated paper currencies, and to place their systems on 
a gold basis ; and the coinage of silver has been restricted 
in many countries. The peoples of Asia and South Amer- 
ica had from time immemorial employed silver as their 
principal money metal, but in 1893 India was compelled 
to discontinue free coinage of the silver rupee. After 
that the movement away from silver extended to Japan 
and various other countries* The result has been that 



BIMETALLISM l6l 

the opening of the twentieth century finds silver, which 
prior to the nineteenth century had been the more com- 
mon medium of exchange, relegated to the position of an 
inferior currency, subsidiary to gold. 

§ no. This change has not come about without pro- 
test, especially in the United States. In 1876, with the 
resumption of specie payments approaching The silver 
at the end of 1878, it was seen that the silver n 



the United 

dollar, then worth but ninety cents, would be states - 
able to displace gold if the famous law of 1873 had not 
stricken it from the list of authorized coins. Immediately 
there began a demand for the free coinage of silver, and 
the "silver issue" made its appearance in national politics. 
In 1878 the Bland-Allison Act was passed, which required 
the government to purchase a certain quantity of silver 
at the market price each year, and coin it into dollars con- 
taining 371.25 grains of fine metal. Under this act, 
$378,166,723 of silver had been injected into circulation 
by 1890, when Congress passed the Sherman Act, provid- 
ing for increased purchases of silver against which legal- 
tender notes were issued. 1 The act of 1878 had effected 
a gradual substitution of silver for gold, and the increased 
inflation of cheap money authorized by the Sherman Act 
led to a more rapid exportation of the yellow metal. There 
is no question that a few more years would have placed 
the country upon the silver basis, by causing the complete 
displacement of gold. In 1893, however, a disastrous 
panic intervened, which was thought to be due in some 

1 Of these notes about $156,000,000 were issued. They were called 
Sherman notes, or notes of 1890. Only about $3,246,000 remained in 
existence at the end of 1911, the rest having been retired. The silver 
purchased by the notes has been coined into standard dollars. 



1 62 PROBLEMS OF MONEY AND BANKING 

degree to the operation of the law of 1890; and, after a 
protracted struggle in Congress, the Sherman Act was 
repealed. This action fanned the agitation into a fiercer 
blaze than ever before, and the presidential election of 
1896 turned almost solely upon the issue of establishing 
the free and unlimited coinage of the silver dollar, then 
worth only fifty-two cents. The defeat of the silver party 
finally disposed of this troublesome question which had 
vexed the country for twenty years. There is no reason 
to doubt that if free coinage of silver had been permitted, 
the operation of Gresham's law would have placed the 
nation on a silver basis, and would have decreased ulti- 
mately by almost fifty per cent the purchasing power of 
"•Jie medium in which debts are paid. 

§ in. For a single nation to attempt free coinage of 
silver at any such ratio as sixteen to one is now generally 
international conceded to be the height of folly. But for 
bimetallism, ftfitfy or forty years international bimetallism 
— another and very different proposition — has occa- 
sioned much discussion. The displacement of silver as 
standard money and the increased use of gold assumed 
large proportions at the very time when the world's gold 
production began to show signs of decrease. Simulta- 
neously there commenced a downward movement of prices, 
by which the purchasing power of the gold dollar stead- 
ily rose from 1873 to 1897. This, naturally enough, occa- 
sioned much discontent and lent great interest to schemes 
for the establishment of international bimetallism, by 
which, it was hoped, an increased use of silver would be 
made possible and the fall of prices would be checked. 

§ 112. Bimetallists urged that the continual fall of 



BIMETALLISM 1 63 

prices increased the burden of all debts growing out of 
contracts that ran for a term of years, and their conten- 
tion has never been successfully refuted. If it Arguments in 
is unjust to permit debtors to pay creditors in ltsfavor - 
money of inferior purchasing power, it must be equally so 
to require them to pay their debts in a medium of which 
the purchasing power has increased; debased currency 
is no more iniquitous than a currency that steadily appre- 
ciates. Moreover, it was argued that falling prices have 
an injurious effect upon industry, since they steadily 
diminish the amount of money that producers can get in 
exchange for their commodities. Bimetallists contended 
that the fall of prices, depressing enterprise and injuring 
debtors, was due to the fact that silver had been partially 
"demonetized," and gold had been made the sole standard 
of value; they urged, therefore, that the leading nations 
should enter into an agreement to permit both gold and 
silver to be employed as money at some proper ratio. 

Debate between the bimetallists and the advocates of 
monometallism turned upon the questions of the evils 
caused by falling prices, the cause of the fall, The fan of 
and the efficacy and practicability of the pro- pnces - 
posed remedy. The arguments advanced by some mono- 
metallists to prove that falling prices do not wrong debtors 
and are a good thing for business do not present an im- 
pressive appearance. 1 Turning to the causes for the fall 
of prices after 1873, it seems tolerably clear that the mono- 
metallists were not successful in their contention that an 
increased demand for gold money had nothing to do with 

1 For instance, if the falling prices prior to 1897 were a good thing 
for business, have the rising prices since that date been a bad thing ? 



164 PROBLEMS OF MONEY AND BANKING 

the change in the price level. Doubtless bimetallists 
exaggerated the influence of the changes in the relative 
demands for gold and silver for monetary purposes; yet 
it seems reasonable to suppose that, as one nation after 
another began to use gold in preference to silver, the 
growing demand for the former metal and the narrowing 
demand for the latter tended to raise the value of the one 
and to depress that of the other. The fall in silver was, 
of course, greatly accelerated by the very large increase 
in the production of that metal after 187O0 

The serious issue between the two parties to the debate 
was the efficacy and practicability of the remedy. proposed 
Practicabn- by the bimetallists. The monometallists ar- 
Mmetaiiic g uec * that a ^ experience showed that the market 
standard. rat j between gold and silver had always 
fluctuated ; and that this fact demonstrated that it always 
would fluctuate, with the result that, at the established 
legal ratio, one metal would always be cheaper than the 
other and would enjoy exclusive circulation. The bimet- 
allist replied that if all the principal nations entered the 
agreement, gold, if it should happen temporarily to be 
undervalued, would not be driven entirely out of use by 
the cheaper silver coins. They argued that Gresham's 
law cannot operate if there is no country where the dearer 
metal can go the moment that it begins to be displaced by 
the cheaper. At the present time something more than 
$7,000,000,000 of gold circulates in the principal lands of 
the earth ; and the bimetallists believed that such a quan- 
tity of metal could not be driven out of use as money 1 and 

1 It is at this point that international bimetallism differs from the pro- 
posal to adopt free coinage of silver in a single country. Under the latter 



BIMETALLISM 165 

thrown into the melting pot without lowering the value of 
gold to a point that would reestablish its parity with silver 
at the legal ratio. Moreover, it was said that, as gold 
should begin to leave the channels of circulation, there 
would be a proportionate increase in the demand for sil- 
ver money, by which the value of that metal would be 
given an upward turn. On this point there may be room 
for considerable difference of opinion, but the belief of 
the writer has always been that, on the assumption that 
a world-wide agreement is attained, the bimetallist had the 
best of the controversy. 

§ 113. The strength of the argument of the monometal- 
lists lay in their contention that a bimetallic agreement, how- 
ever desirable it might be, could not be reached 

, „ , , .. . The strength 

by all the leading nations; and, if reached, of opposing 
would not be certain of continued maintenance. argumen s ' 
As a matter of fact repeated conferences were held by 
various countries, including the United States, which has 
constantly tried to "do something'' for silver; but there 
has never been any prospect that England, and perhaps 
Germany, would abandon the gold standard. The vast 
commerce of England has been built up since 181 6 upon 
the basis of the stability of the gold sovereign, and English 
merchants are not willing to take any chances with a 
system dependent on international agreement. Germany 
adopted the gold standard partly for political reasons; 
and although there has been a strong bimetallist move- 
ment in that country, it has never seemed probable that 
the government would accept an international agreement 

condition, gold could be exported to many other countries to be used as 
money. 



1 66 PROBLEMS OF MONEY AND BANKING 

for the free coinage of silver. This, then, was the rock 

on which the projects of the bimetallists always shattered. 

§ 114. If the gold production had remained as small 

as it was so late as 1890, and prices had continued to fall, 

it is probable that international bimetallism 

Conclusion. i-i.ni • e -r. 

would still be a topic of vital interest. But 
the enormous increase in the output of gold, which at 
length caused an upward movement of prices, has produced 
the very condition for which the bimetallists contended, — 
a larger volume of money that would check the decline of 
prices. It has also deprived their schemes of all present 
importance, and made bimetallism a topic of purely aca- 
demic interest. So long as the world's gold output con- 
tinues to be as large as $450,000,000 annually, the gold 
standard will not be replaced by a bimetallic agreement. 

FOR SUPPLEMENTARY STUDY 

General : Bullock, Selected Readings in Economics, 406-430 ; 
Hadley, Economics, 207-231, 241-263; Nicholson, Po- 
litical Economy II, 125-130, 140-205 ; Seager, Introduction 
to Economics, 310-360; Taussig, Principles of Economics, 
Bk. III. 

Special : Bullock, Essays on the Monetary History of the United 
States, 29-121 ; Dunbar, Theory and History of Banking, 1- 
94, 158-190 ; Jevons, Money and the Mechanism of Exchange, 
192-284 ; Kinley, Money ; White, Money and Banking, 60- 
102, 130-163, 174-216, 372-384, 4I7-43I- 



CHAPTER IX 

MONOPOLIES 
I. Introduction 

§ 115. Monopoly means such control over the supply 
0} a commodity as conjers the power to fix the price. It 
may be secured either by buying up, "corner- Monopoly 
ing," the major part of the available stock, defined - 
or by acquiring the exclusive or substantially exclusive 
power to produce the commodity. Control secured in the 
first manner can be only temporary, because efforts to 
" corner" the supply in order to raise prices merely tempt 
more capital into an industry and increase the output; 
if, however, control is attained in the second way, there 
may be a prospect of permanent success. 

An absolute mastery of supply, and hence of prices, sel- 
dom or never exists, since it is generally possible to procure 
substitutes for a monopolized commodity, and 
this will be done to an increasing extent as monopoly 
charges are raised. Soft coal or coke may be 
used instead of anthracite, cotton may be employed in place 
of wool, electricity may be utilized instead of illuminating 
oil, and many similar substitutions can be effected. This 
consideration is not a defence or justification of the action 
of the monopolizer who puts consumers to the trouble of 

167 



1 68 MONOPOLIES 

devising substitutes, which are often inferior to the origi- 
nal article ; but it does set an ultimate limit beyond which 
the power of a monopoly cannot extend. 

Then, again, the monopolist is likely to be disturbed by 

the constant establishment of rival enterprises which are 

called into existence by the high prices that he 

suppressing maintains. Our most successful trusts have 

competition. . . 

never produced more than eighty to ninety-five 
per cent of the products which they controlled; and the 
higher that prices are raised, the larger becomes the num- 
ber of rival establishments. The fear, therefore, of possible 
competition may sometimes limit the power of a combina- 
tion over the price of a monopolized commodity. 

§ 116. Upon the facts that substitution is possible and 
competition is probable if prices are raised to exorbitant 
Denials of the % ures ? ^ e apologists for monopoly have based 
existence of the claim that there are few or no monopolies 

monopolies. . . 

in the United States. Monopoly, however, does 
not mean absolute control; it means merely the power to 
raise prices somewhat above the marginal cost of produc- 
tion, the point at which competitive prices are fixed. The 
employment of substitutes does not begin until prices 
are raised above the competitive level, and the fact that 
a few independent concerns furnish ten or twenty per cent 
of the product does not keep prices down to the mar 
ginal cost of production. For most practical purposes, 
control over seventy, eighty, or ninety per cent of the 
supply confers the power to raise prices, and answers all 
the objects of the monopolist. In fact, it is frequently 
advantageous to have the appearance of competition 
maintained, since this makes it easier to delude the public. 



INTRODUCTION 1 69 

§ 117. If we leave out of account exceptional cases in 
which the possession of extremely rare artistic or business 
skill confers monopolistic power upon a person, 

C13.SSCS 01 

we can divide monopolies into three classes, monopolies: 
First in order we may place legal monopolies, 
which are dependent upon an exclusive grant from a gov- 
ernment ; they may be either private or public in character. 
In the one case the government grants an exclusive privi- 
lege to an individual or group of persons ; in the other, it 
reserves to itself the sole power to conduct some enter- 
prise. Private legal monopolies were secured in early 
times through the mere favor of the sovereign; but to- 
day, as with patents and copyrights, they are granted 
for a limited term of years for the purpose of encourag- 
ing invention and fostering letters. In some industries 
patents have become an important factor in developing 
and maintaining large monopolies. Public legal monopo- 
lies may be established in order to provide for the better 
administration of some important service, as the postal 
department; or may be created as the best method of 
taxing the people, as the tobacco monopoly in France. In 
the one case prices may be kept low in order to encourage 
the extensive use of the service; in the other, they will 
be made high enough to bring in the maximum profits. 
Sometimes, indeed, the two purposes are more or less 
mingled in the same enterprise, as in the Prussian railway 
service, which, although originally undertaken for other 
purposes, has become a source of large revenue. 

Second in order are natural monopolies, which arise on 
account of peculiar properties inherent in certain lines of 
business. Many natural agents of production are nar- 



iyo MONOPOLIES 

rowly limited in supply, and the limitation is frequently so 
strict that it is possible for a group of persons to acquire 
(2) Natural control of them. Practically all of the anthra- 
monopoiies. cite coal of the Tj n i te( } States is found in a 

comparatively small area in Pennsylvania, and it has been 
possible for a group of railways, in defiance of express 
provisions of law, to acquire a monopoly of hard coal. 
So, too, petroleum fields, deposits of copper and iron ores, 
water powers, irrigation facilities, water fronts of large 
cities, and many other natural agents are so limited in 
extent as to fall into the control of a small number of 
persons or companies. Such a condition is very favor- 
able for the growth of a monopoly, although this result 
may not appear in all cases. 

A second group of natural monopolies originates from 

the fact that certain products or services can be consumed 

only in connection with an expensive distrib- 

monopoiies uting apparatus. Gas, water, and electricity 

{continued). .. . . 

can be supplied only to persons who have 
connected their houses or factories with the mains, pipes, 
or wires required for their distribution. Street or steam 
railways can reach their customers only by constructing 
tracks in certain localities, and the telegraph and telephone 
present the same conditions. In all these cases it is 
cheaper for one company to supply a given district than 
for two concerns to duplicate the distributing plants and 
compete for business. Accordingly, whenever competi- 
tion is attempted, capital is wasted in needless duplication 
of pipes, tracks, or wires; and the managers of rival 
concerns perceive, sooner or later, that, even apart from 
the possibility of raising prices, more money can be made 



MONOPOLY VALUE \J\ 

by forming a combination and eliminating unnecessary 
expense for the distribution of the service. For this 
reason monopoly may be regarded as the condition that 
must ultimately prevail in such an industry. 

The so-called capitalistic monopolies constitute a third 
class. They have been formed in many branches of 
manufacturing industry that do not seem to 

? . . ., . (3) Capital- 

pOSSeSS the characteristics attributed to natu- isticmonop- 

ral monopolies; and it is alleged that they are 
due to the economies that result from the combination of 
competing enterprises. If this should turn out to be the 
case, it would seem that they must be considered just as 
natural as the monopolies in the gas, water, or electric- 
lighting industries; so that the distinction between our 
second and third classes would disappear, The belief of 
the writer, however, is that this is not the case, as will be 
set forth in a later part of this chapter. 

II. Monopoly Value 

§ 1 1 8. Whenever competition prevails, it is in the in- 
terest of every producer to increase his output as long as the 
price remains high enough to yield him a profit ; The deter- 
since, if he should curtail production, other Monopoly * 
concerns would extend their sales at his ex- values - 
pense. The monopolist, however, possessing for the* time 
being an effective control over the industry, is able to 
restrict the output and to raise the price of the commodity 
to such a point as proves to be most profitable. For this 
reason the value of a monopoly product will not be gov- 
erned by the same principles that apply when competition 
exists. The general law of monopoly prices is that they 



172 MONOPOLIES 

will be adjusted in such a manner as to yield the monopo- 
list the largest profits obtainable from the industry; or, 
in technical language, will be fixed at the point of high- 
est net returns. In determining where this point is, the 
intelligent monopolist will take into account the following 
considerations : — 

(i) As the price is raised above the former level estab- 
lished by competition, the demand will inevitably decline, 
and the monopolist must reduce his output. If he does 
not pursue this course, part of his goods will remain un- 
sold at the price which he desires to maintain. With 
articles of voluntary consumption, the demand falls off 
very rapidly as the price is raised, so that the power of 
the monopolist is quickly limited by reason of the fact that 
exorbitant charges decrease the sales faster than they 
increase the profits on each article sold. With neces- 
sities, the power of the monopolist is greater; and prices 
can be raised very materially before the sales decline enough 
to make further increase unprofitable. 

(2) Certain expenses of production increase or decrease 
nearly proportionately with corresponding changes in the 
product; 1 while others remain absolutely or approxi- 
mately the same however large the output may be (§69). 

(3) The maximum net revenue that may be obtained 
is determined by disregarding all the fixed expenses, and 
by studying with care (a) the quantity of the product 
which consumers will demand at various prices, and (b) 
the variable expenses chargeable to each unit of the supply. 

1 Sometimes the variable expenses will decrease as the output is 
enlarged, when considerable advantages attend production on a larger 
scale. 



MONOPOLY VALUE 



173 



§ 119. The problem will be made clearer if we consider 
the assumed case of a street railway company which 
monopolizes the traffic of a small city. Sup- The law of 
pose that the fixed expenses of such a company ™*e P mus- 
for interest on the bonded debt, salaries of trated - 
principal officials, and other similar items amount to 
$40,000 annually; and assume that the variable expenses 
amount to 2 cents for each passenger carried. Then 
suppose that a fare of 10 cents will induce 600,000 persons 
to patronize the company in the course of the year, and 
that lower fares increase the traffic until a price of 3 cents 
attracts 4,000,000 passengers. The elements which the 
company will study in determining what fare to charge 
are shown in the following table: — 



Fare 


Passengfrs 
Carried 


Total 

Earnings 


Variable 
Expenses 


Net 
Earnings 


Fixed 

Expenses 


Net 
Revenue 


IO 


600,000 


$60,000 


$12,000 


$48,000 


$40,000 


$8,000 


8 


800,000 


64,000 


l6,000 


48,000 


40,000 


8,000 


6 


1 ,400,000 


84,000 


28,000 


56,000 


40,000 


l6,000 


5 


2,000,000 


100,000 


40,000 


60,000 


40,000 


20,000 


4 


2,500,000 


100,000 


50,000 


50,000 


40,000 


10,000 


3 


4,000,000 


120,000 


80,000 


40,000 


40,000 





Under the conditions here represented it is evident that 
the total receipts of the company steadily increase until a 
fare of 3 cents is reached; and that, if the mu . 

° ' ' The lllustra- 

variable expenses did not affect the problem, tion further 

. r ^ ^ ^ i • j i_ considered. 

the largest profits would be obtained by 
establishing this low charge. But when the variable 
expenses are taken into account, it is seen that 5 cents 



174 MONOPOLIES 

wiil be the most profitable fare; since from 10 cents 
down to 5 the traffic increases faster than the variable 
expenses; while below that point these expenses increase 
more rapidly than the traffic. It is obvious, too, that 
the fixed expenses never enter into the calculation. A 
fare that yields the largest net income above the variable 
expenses will also afford the largest amount of revenue 
that can be secured for meeting the fixed charges. If, in 
this case, the net earnings with a 5 -cent fare had been 
insufficient to defray the fixed charges, the company 
would only have made the situation worse by adopting a 
different rate; as it is, our figures show that all expenses 
can be met, and that $20,000 will still remain available for 
dividends to the stockholders. A monopoly price, there- 
fore, does not mean the price that the most necessitous 
consumer would conceivably pay, but one that yields the 
highest net returns; for, indeed, if the demand for a 
commodity is very elastic, it may happen that the monopo- 
list cannot raise the price far above the point at which 
competition would have placed it. 

III. Natural Monopolies 

§ 120. It is now generally recognized that perma- 
nent competition cannot be expected in industries that 
Municipal exhibit the characteristics attributed to nat- 
monopoiies. ura j monopolies. When American cities first 
began to require extensive waterworks, lighting facili- 
ties, and means of transportation, it was generally 
supposed that the way to secure good service and low 
prices was to charter a number of competing companies. 
In this manner enormous amounts of capital were wasted, 



NATURAL MONOPOLIES 1 75 

while the anticipated competition always proved illusory. 
In many cases the rival companies were consolidated; 
and where this was prevented or considered inexpedient, 
they formed secret agreements to keep out of one another's 
territory and to maintain high charges. The growth of 
the cities has served merely to increase the gains of com- 
panies enjoying municipal franchises, and these profits 
have been concealed by issuing watered stock upon which 
moderate rates of dividend could be paid. 1 

§ 121. Even more serious have been the political evils 
which have flowed from these conditions. Municipal 
franchises are so profitable that the temptation Political 
to secure them, on terms unfavorable to the corru P tlon - 
city, by corrupt means has been too strong to be resisted. 
Originally the franchises were bestowed without thought 
of their actual or prospective value ; and it is only within 
a short time that we have awakened to the fact that cor- 
rupt boards of aldermen have been bartering away the 
birthright of all the people to powerful corporations that 
use the privileges accorded them for the purpose of exact- 
ing extortionate gains. Gradually the poison of bribery 
has worked itself into all parts of our municipal govern- 
ments, and has extended to the state legislatures, which 
have the power to control local bodies. The notorious 

1 A street railroad which costs $1,000,000 to build and can earn 
$150,000 a year must pay 15 per cent dividends in order to distribute the 
earnings among the stockholders. Now by issuing $2,000,000 of watered 
stock and increasing the capitalization to $3,000,000, the moderate rate 
of 5 per cent will distribute the earnings. The company will then deny 
that its earnings are exorbitant; and will oppose attempts to reduce fares, 
on the ground that if charges are reduced it will not be able to pay the 
very moderate rate of 5 per cent to the widows and orphans who have 
purchased its stock. 



IJ6 MONOPOLIES 

evils of American city governments are not due to ignorant 
foreign voters, or to the alliance of the police force with 
vice, to any such extent as they are attributable to the 
misdeeds of those who consider themselves respectable 
citizens and the leaders in financial or social circles; for 
back of the "boodle alderman" one always finds the 
respectable banker or the eminent financier. The piracy 
of municipal franchises, in fact, is the principal cause of 
the corruption and inefficiency that are so unfortunately 
characteristic of city governments at the present day. 

§ 122. Happily our people are beginning to realize the 
nature and extent of these evils, and are seriously study- 
Municipai m g various remedies suggested for the un- 
ownership. fortunate condition of affairs. Many writers 
have favored municipal ownership of all natural mo- 
nopolies ; and this proposition, which ten or fifteen years 
ago was considered rank socialism, has commanded an 
increasing amount of support. In behalf of the plan 
it is argued that, since monopoly is inevitable in these 
industries, our only choice lies between public and private 
monopoly, and that the former is far preferable to the 
latter. Private monopolies, it is contended, cannot be 
allowed to go uncontrolled; and the attempt to regulate 
them arrays powerful corporations against the public in- 
terest, with results that are disastrous to the virtue of city 
officials and state legislatures. Corruption and extor- 
tion, it is said, can be remedied only by having the ac- 
credited agents of all the people manage these enterprises 
with a single view to the interests of the public. 

But the problem hardly admits of such a simple solu- 
tion. Monopoly, it must be conceded, is inevitable; 



NATURAL MONOPOLIES \jy 

and our only alternatives are, admittedly, public owner- 
ship or private ownership with public control. But public 
ownership presents serious difficulties, chiefly i ts dim- 
that of securing efficient and honest man- culties - 
agement. At the present, from the federal postal es- 
tablishment down to the small municipal printing office, 
public management is found to be frequently ineffective, 
and not infrequently dishonest. Laborers engaged on 
public works are likely to demand short hours and the 
highest pay, while working at a pace that must be ex- 
ceeded by the citizen who hopes to pay his annual tax bill ; 
governments must purchase materials and supplies from 
contractors, many of whom will stoop to such bribery as 
has been exposed in the postal service; and the result is 
that the cost of operation is often higher than it would be 
under a private corporation. Moreover, when a deficit 
appears in a public enterprise, it is likely to be viewed 
with extreme complacency by the large number of citizens 
who pay no taxes on real or personal property, but secure 
the service for less than cost. Evidently, public owner- 
ship, even if it is better than private, carries with it very 
grave difficulties which make it, at the best, nothing but 
the less of two evils. 

Our cities have had the most experience with municipal 
waterworks, which are now more often public than pri- 
vate, especially in the larger centers of popu- The lessons 
lation. The results of public management of experience, 
have been better in this case than they would be in the 
lighting or transportation industries, since waterworks 
are simpler in operation and most of the methods 
and appliances have long since passed out of the 



178 MONOPOLIES 

experimental stage. We have had few experiments with 
municipal gas plants, and the teachings of experience at 
this point are somewhat conflicting. A larger number 
of cities have entered the electric-lighting industry, but 
the movement is too recent to permit one to form any- 
thing like a final conclusion. With street railways, public 
management is practically untried, although municipal 
ownership of subways which have been leased to private 
companies has been adopted in New York, Boston, 'and 
perhaps other cities. In all industries success or failure 
has depended on the character of the local governments; 
and, wherever the politicians have been allowed to rob the 
people, municipal ownership has proved anything but an 
unmixed blessing. 

§ 123. Between the alternatives of public ownership 

and private management under public control, it will be 

wise for the student to refrain from making 

Conclusions. . . . 

any general decision; m fact, the only safe 
course is to decide each case that arises with reference 
to its particular circumstances. Municipal ownership 
of waterworks has, on the whole, justified itself by its 
results; public management of street railways at a 
time when all the methods and appliances have not 
yet passed out of the experimental stage would be far 
more hazardous. 1 In all cases the probability of securing 
honest and efficient management is the factor to be given 
the chief weight. A reform of the civil service by which 
appointments to public office can be separated from poli- 

1 Since 1890 the method of propelling cars has been revolutionized by 
electricity, and one form of electrical equipment after another has come 
into use. 



NATURAL MONOPOLIES 1 79 

tics is an absolutely indispensable condition for the fur- 
ther extension of municipal enterprise; and in any case 
the ugly problem of bribery must be grappled with, since 
this will not be eliminated by the adoption of public man- 
agement. During the past decade American cities have 
made encouraging efforts to improve the management of 
municipal affairs, and various states have established 
commissions with necessary power to control public ser- 
vice ' corporations. Enough has already been accom- 
plished to justify the expectation that such control will 
become increasingly effective. While, therefore, experi- 
ments in municipal ownership may be desirable, effective 
public control may make unnecessary the general adop- 
tion of public ownership. 

§ 124. Besides the various municipal services just 
mentioned, the railroads, the telegraph, and the tele- 
phone industries possess the characteristics of other na t U rai 
natural monopolies. The railroad problem m ° n °P° lies - 
is so extremely important that it will require treatment 
in a separate chapter; the telegraph and telephone 
industries cannot receive adequate attention in the space 
at our command. The events of 1902 have brought into 
prominence the fact that the country's supply of anthra- 
cite coal has fallen into the hands of a few railroads which 
have acquired a substantial monopoly of the mines. It is 
probable that from one dollar to a dollar and fifty cents is 
added by the coal monopoly to the price of every ton of 
anthracite coal consumed in the United States, and some 
of the magnates in charge of the roads have been so 
destitute of humor as to inform the country that this con- 
dition of things has been expressly ordained by divine 



180 MONOPOLIES 

Providence. It is possible that the extortion now prac- 
ticed will some day be remedied by vigorous treatment of 
the railway problem, but at present we find in the anthra- 
cite coal industry a striking illustration of the importance 
that natural monopolies sometimes assume. 

IV. Capitalistic Monopolies 

§ 125. Not long after the Civil War various agreements 

were formed in the distilling and some other industries, 

by which producers undertook to limit the out- 
Agreements ■' x 

between put and to raise prices. These arrangements, 
however, were seldom of long duration, since 
one or more of the parties to a compact would usually 
break his promise and increase his sales at the expense of 
those who kept their word. Similar efforts to harmonize 
conflicting interests and establish monopoly prices have 
continued to the present day; but generally mutual 
jealousy and suspicion have prevented them from being 
very effective, even when they have been reenforced by 
the establishment of common selling agencies. Yet a 
"friendly agreement" between a few large beef packers 
in Chicago and some other cities has sufficed to build up 
a partial monopoly of the dressed beef industry. 

§ 126. The weakness of the " gentlemen's agreement" 

led to the establishment of a more formal organization 

known as a pool, by which is meant an agree- 

Thepool. t . i 1 . , , 

ment to divide the territory served, or the 
business obtained, or the earnings of the industry. Pools 
have been most extensively used by the railways of the 
country, but such associations existed in the steel rail 
industry prior to 1897, and have been renewed in recent 



CAPITALISTIC MONOPOLIES 181 

years in nearly all branches of the steel trade. They often 
enable producers to raise prices for a considerable period 
of time, 1 but may be broken up on account of the same 
weakness that is so fatal to the informal agreement. The 
courts long ago decided that pooling contracts, since they 
have a tendency to restrain trade and are contrary to 
public policy, cannot be legally enforced; and it is very 
difficult to devise a system of fines or other penalties that 
will prevent some members from breaking a pooling agree- 
ment when a strong inducement is offered for doing so. 

§ 127. A more effective device was invented in 1882 
when the Standard Oil Trust was established. In the 
trust a large number of firms and corpora- 

& r The trust. 

tions which had already been brought under 
a single control were united under a board of trustees. 
The stockholders in the various companies surrendered 
their stock to the trustees, and received trust certificates 
for the amounts at which their property was valued. 
This arrangement placed effective control of the different 
enterprises in the hands of a single board; and within a 
few years, the plan was adopted by combinations in several 
other industries. By 1887 this movement toward the 
formation of trusts reached such proportions as to create 
considerable alarm at the spread of monopoly, and to call 
forth a large number of repressive statutes. During the 
next five years many states enacted anti- trust laws; and, 

1 In the spring of 1896 a pool raised the price of steel rails by degrees 
from $17 to $25 per ton at Pittsburg; subsequently the price was ad- 
vanced to $29. In 1897, wnen the pool was dissolved, the price fell to 
#15, and even lower. The United States government had been charged 
#563 per ton for armor plate ; but after the dissolution of the pool, one of 
the steel companies submitted an offer at a price of $240. 



1 82 MONOPOLIES 

in 1890, Congress passed what is known as the Sherman 
Act, which prohibits all contracts or combinations in re- 
straint of interstate commerce. Little was accomplished 
under most of these statutes, but the courts at length 
decided that the trust was an unlawful form of organiza- 
tion. 1 Accordingly the trusts were ostentatiously dis- 
solved, and forthwith reorganized in another form; so 
that they still exist in fact, though not in name. 

§ 128. The so-called trusts of the present day are merely 
large corporations which have issued their securities in 
The present order to purchase the companies which were com- 
capTtaiistic bined under one organization. For some years 
monopolies. after its enactment the Sherman Act was not 
enforced with any degree of success against industrial 
combinations. But under its provisions the Supreme 
Court in 1904 dissolved a company organized under the 
laws of New Jersey to hold the stock of certain railroad 
companies in the Northwest. Thereafter various in- 
dustrial and commercial combinations were successfully 
attacked, and a vigorous enforcement of the Sherman 
Act was undertaken against a long list of organizations, 
both large and small. In 1911 the Standard Oil Com- 
pany and American Tobacco Company were finally dis- 
solved, but were allowed to reorganize in the form of a 
number of separate companies which probably remain 
practically under single control. There is now no doubt 
that the Sherman Act effectually restrains formal organi- 

1 This was decided in New York on the ground that when a corpora- 
tion surrenders its stock to trustees, it abdicates control of its business, an 
action which is ultra vires, that is, beyond the powers bestowed upon it 
by its charter. 



CAPITALISTIC MONOPOLIES 1 83 

zation to monopolize trade between the states, but it is 
doubted whether it can compel producers to compete. 
It is certain, however, that the formation of trusts has 
come to an end, and that all persons who by common 
ownership of stock, price agreements, or otherwise, com- 
bine to monopolize trade do so at serious peril. 

§ 129. Trusts have found numerous apologists or active 
advocates, who, for a decade or more, have argued that 
modern combinations are merely the latest and 

~- . . . . Arguments in 

most efficient method of organizing capital, favor of com- 
and the highest product of industrial evolu- 
tion. The principal basis for such claims consists of 
certain economies which, it is alleged, can be realized by 
the combination of all the companies engaged in an in- 
dustry. The savings attributed to the formation of trusts 
may be divided into two classes: those supposed to be 
effected in the process of production, and those realized 
in the marketing of products. 

Of the first class, the alleged economies are due to the 
advantages of production on a large scale. At this point 
the advocate of the trust usually contrasts 

Alleged 

small-scale production with a combination of economies in 
all competing plants, and argues that decided pr ° UC 10n ' 
superiority lies with the latter. But this is very wide of 
the mark, since the real question is whether the trust is 
superior to the very large concerns which it unites — ■ 
whether, for instance, the United States Steel Corporation 
is a more efficient producer than the Carnegie Company, 
which it absorbed, or than the Lackawanna Company, 
which has entered the industry as a competitor with a 
capital of some $40,000,000. When the matter is ex- 



1 84 MONOPOLIES 

amined in this way, and confusion of large-scale production 
with monopoly is avoided, the argument in favor of the 
trust does not appear to be very strong. Experience 
seems to show that in manufacturing industry there are 
limits beyond which an increase in the size of a company 
will not reduce the cost of production, and that this point 
is reached long before a single concern becomes large 
enough to monopolize the whole field. In practically 
every industry that has been dominated by a trust ; in- 
dependent concerns have continually made their appear- 
ance, and have competed so effectively that they have been 
crushed, if at all, only by foul means. 

When, however, we turn to the work of marketing 
products, the case in favor of combination is not so weak. 
Economi s ^ monopoly can avoid some of the outlay 
in marketing which competing firms incur for advertising 

products. 1. 1 , ., 

and traveling salesmen, while occasionally 
something can be saved in freight rates by sending every 
order to be filled at the mill that is nearest to the consumer. 
But it must not be forgotten that a large amount of adver- 
tising is necessary in order to stimulate the demand for 
certain products, and that some trusts that originally 
made deep cuts in their advertising expenses found that 
the demand declined so rapidly that a more liberal policy 
was necessary. Then, too, a factory that is content to 
supply its natural territory and not ambitious to control 
all markets, however distant, does not need to make such 
excessive expenditures in pushing its sales. And finally 
the freight rates saved by avoiding cross- shipments are 
not a large factor in the case of products which are not of 
a bulky character; while, with bulky goods, production 



CAPITALISTIC MONOPOLIES 1 85 

is usually pretty well localized in the vicinity of the 
principal consumers before combinations are formed, so 
that there is generally little room for saving in cross 
freights. While it must be conceded that a monopoly 
may be able to effect some savings in marketing its prod- 
ucts, it is certain that the economies thus attained have 
been greatly exaggerated. 

More than twenty different economies are said to be 
attained by combinations, and the list is so formidable 
as to raise the question how, if the facts are „,, 

p- The persist- 

as alleged, an independent concern can have enceofcom- 

1 r • r -vt 1 petition. 

the faintest prospect of success. Now the 
fact is that new competitors generally arise shortly after 
a trust is formed, and that competition with the combina- 
tions has steadily increased. 1 It is evident that the busi- 
ness world has not accepted the argument that the trust 
is more efficient than an independent concern of large 
size, but has proceeded upon the opposite theory. For 
the present, therefore, the student will do well to entertain 
a profound skepticism concerning the net advantages of 
the trust. 

A consideration that generally escapes notice is the 
fact that large combinations are subjected to constant 

1 Advocates of the trusts usually enter a demurrer here, and say that 
this proves nothing, since the new companies are organized for the purpose 
of selling out to the trusts at high prices. The point is not well taken, 
however, for no intelligent corporation manager, possessing a plant that 
could produce a commodity more cheaply than any possible competitor, 
would long continue to buy out inferior establishments that could not hope 
to live in the face of fair competition. A new and superior agent of pro- 
duction, like the power loom, can be set to work without buying up all the 
hand looms; and this would be true of the trust if it were the most effec- 
tive method of organizing production. 



T S6 MONOPOLIES 

expenses from which the independent concern may L*? 
comparatively free. The ablest legal talent must be em- 
ployed at great expense to devise methods of 

Disadvan- x . J ... 

tagesofa circumventing inconvenient statutes; an expen- 

combination. . . . , , . , 

sive secret service is sometimes needed in order 
to spy out the affairs of competitors by methods that 
involve considerable wear and tear upon the self-respect 
of both principal and agent; large contributions must 
be made to the campaign funds of one or both political 
parties, since the politicians must be conciliated at all 
hazards; while enormous sums must be constantly in- 
vested in suppressing competitors, and giving a proper 
warning to prospective interlopers. It will be observed 
that we here assume that the company never stoops to 
actual bribery or makes large legislative expenditures 
which have to be charged up to the construction account. 
When, indeed, all factors are taken into consideration, it 
seems doubtful whether one should speak of the net savings 
or the net wastes that result from combination. 

§ 130. The whole ground covered by the debate con- 
cerning the advantages of the trust is too large for us 
The alleged to examine it in all details, but it should 
chSactefof be remarked that the argument in favor of 
competition, combination usually begins with the propo- 
sition that competition is not only a wasteful but a 
destructive process. Combination is represented as 
the natural refuge for competing concerns that have been 
wasting their substance in a life- and- death struggle for 
survival; and, in particular, it is alleged that hard times, 
which destroy profits, are the real parents of the trust 
movement. The claim is disproved by the simple fact 



CAPITALISTIC MONOPOLIES 1 87 

that trusts are formed, not in times when business is 
depressed, but in periods of prosperity. In 1893, the 
year of the last serious panic, new combinations were 
formed with a capitalization of $239,000,000. The follow- 
ing year, when the prostration of industry was complete, 
the capitalization of organized trusts was only $30,400,000 ; 
and the movement continued to show small proportions 
until 1898, when prosperity had fully returned. In 
that year the newly organized trusts had a capital of 
$708,000,000; in 1899 the figures rose to $2,243,000,000; 
and in 1900 stood at $831,000,000. After 1902, when 
conditions in the stock market became unfavorable, it 
proved difficult to carry through any sort of scheme for 
securing the "economies of combination"; not adversity, 
then, but prosperity seems to be the condition favorable 
to the growth of trusts. 

§ 131. This brings us to a more important considera- 
tion. The combinations formed between 1897 and 1902 
were organized not for the purpose of realizing The re 
economies in manufacturing commodities, but for trust move- 
the profits to be derived from marketing stocks, united 
The return of prosperity sent investors into the 
stock market in search for securities in which to invest 
the profits drawn from their business enterprises. Under 
this demand stocks rose to high prices and a speculative 
fever was induced which broke all restraint and carried 
prices up to still higher figures. This was the opportunity 
for the promoter of companies, and he was not slow to 
seize it. The country needed few new railroads, and the 
best thing to operate in was the staple branches of manu- 
facturing industry. Options were secured upon large 



188 MONOPOLIES 

numbers of plants, good, bad, and indifferent; extrava- 
gant prices were offered, payment being made more often 
with securities than with money; and the stocks or 
bonds of the newly formed combinations were offered 
to investors, who greedily seized the bait. This pro- 
cess continued as long as the public would purchase the 
securities, and it came to a close when, in 1902, the in- 
vestor concluded that he had had enough and abandoned 
Wall Street. The economies of combination figured 
largely in the prospectuses of the new companies, but 
they had little or nothing to do with the entire movement. 
The ordinary method of capitalizing a trust was to 
issue preferred stock or bonds in order to pay for the 
overcapitaii- plants, and then to print as much common 
zation. stock as there was any prospect of selling 

to the public. Thus the common stock has almost invari- 
ably represented nothing but water; while the preferred 
stock, issued to pay for factories bought at exorbitant 
prices, has usually exceeded a conservative valuation of 
the property owned by the trust. The result has been 
what one might have expected; some of the trusts have 
not disappointed the persons who bought their bonds 
or preferred shares, and have even managed to pay some- 
thing on their common stock; but the majority have 
shown much less favorable results, and have caused 
serious losses to investors. 

§ 132. But the profits derived from floating companies 

are not the only cause of the formation of in- 
special privi- , 
lege a cause dustrial combinations, and do not account for 

the success which some of them have attained. 

Patents have been a factor of some importance, the 



CAPITALISTIC MONOPOLIES 189 

production of certain products, such as cigarettes, barbed 
wire, and wire fencing, having been controlled for a time 
by reason of the ownership of all the available patents. 
Discriminating railway rates have had a vast influence 
in fostering monopoly, 1 and it is probable that some of 
the largest trusts still enjoy more favorable terms than 
their competitors. Then, too, elements of natural mon- 
opoly can be discovered in many of the combinations. 
The Standard Oil Company has profited greatly through 
its control of pipe lines, 2 the United States Steel Corpora- 
tion owns a large part of the supplies of Bessemer ore in 
the United States, and in the copper industry the effort 
has been made to secure control of all the principal mines. 
It seems probable, in fact, that whatever tendency toward 
monopoly may have existed in manufacturing industry 
has been due to the causes here mentioned rather than to 
any economy derived from replacing large-scale produc- 
tion by monopoly. 

§ 133. Some of the responsibility for the formation of 
trusts and particularly for the extortion which they 
have sometimes practiced must be laid at the The i nflU ence 
door of our protective tariff, which imposes ofthetanff - 
heavy duties upon imported goods that might other - 

1 The early growth of the Standard Oil Company is attributable chiefly 
to this factor; and, despite denials, it seems clear that rates are still 
adjusted so as to favor the points where this concern's refineries are estab- 
lished. In most cases proof of the existence of this evil is hard to obtain, 
but it can be adduced in the case of the beef trust and some others. 

2 By controlling the pipe lines the Standard Oil interests can oblige in- 
dependent companies to pay sixty cents a barrel for service which costs but 
ten or twelve cents to provide ; and it has here an advantage of about one 
cent a gallon on oil exported from the country. 



igo MONOPOLIES 

wise compete with the products of the trusts. It was 
the original theory of protection that, although foreign 
competition might be prevented by means of a high duty, 
competition among domestic producers would insure fair 
prices to consumers. The situation is radically altered, 
however, when foreign competition is excluded by tariff 
regulations of the government, and then the home 
manufacturers unite to raise prices under the shelter 
afforded by the tariff. In 1904, for instance, American 
railways were compelled to pay $28 per ton for steel 
rails delivered at Pittsburg, while they transported to 
Canada similar goods for which the Canadians were 
charged $20 per ton. This sort of thing is common 
in the iron and steel industry, and occurs frequently 
enough elsewhere. Some few of the trusts, such as the 
sugar combination, have been formed largely because 
of conditions created by the tariff; and the power which 
most of the others have possessed over prices has been 
greatly increased by reason of the tariff duty. To this 
it is sometimes replied that the Standard Oil Company 
originated in an industry that was not dependent on the 
tariff, and that trusts exist in England under free trade. 
Neither consideration is relevant, however, for no one 
imagines that all trusts are due to the tariff ; while it is a 
well-known fact that in England few combinations exist 
enjoying any such control as American trusts possess over 
their industries, and that no English trust can levy a tribute 
of a single penny on account of the action of the govern- 
ment in excluding foreign competitors. The simple 
fact is that the tariff called a few trusts into being, and 
enables most of the others to raise prices higher than 



CAPITALISTIC MONOPOLIES 191 

would be possible if competition prevailed at home or 
relief could be secured through foreign sources of supply. 
A reform of the tariff would not settle all problems con- 
nected with trusts, but it would curtail their power of 
plundering the public. 

§ 134. It is sometimes alleged, indeed, that the trusts 
do not raise the prices charged consumers, and statistics 
are produced in support of this contention. TrustS and 
The admirers of the Standard Oil Company, prices - 
in particular, have insisted that this concern is responsible 
for the reduction in the price of refined export oil, which 
fell from thirty cents in 1870 to about six cents in 1898; 
and many people are inclined to the belief that this trust 
has actually cheapened oil. But such statistics do not 
show the margin or difference between the price of crude 
oil, which the Standard buys from the wells, and the 
refined product ; and, clearly enough, it is only by observ- 
ing what this margin has been that one can judge of the 
effect of the monopoly upon prices. In 1870 the differ- 
ence between the price of crude oil and that of refined 
ranged from fifteen to twenty cents, and by the close of 
1879 competition between the Standard Oil Company 
and various rivals had reduced it to between five and 
six cents. In 1882, when the trust was finally formed, 
the margin was seldom as high as six cents; and from 
that day to the present it has never fallen, except tempo- 
rarily, under the influence of competition; but whenever 
the disappearance of competitors or the necessities of 
the consumers would permit, the margin has increased. 
The decline in the margin between crude and refined 
oil was brought about, therefore, prior to 1882, by the 



192 



MONOPOLIES 



influence of competition; since that year monopoly has 
checked the movement. Moreover, the export prices 
do not show what domestic consumers pay for their oil. 
In 1 901 the Industrial Commission found that in regions 
where competition was met from local refiners, the Stand- 
ard Oil Company sold oil for as little as 5.5 cents; while 
in places where competition did not exist, the consumers 
paid as much as twenty or twenty-five cents. These 
discrepancies cannot be explained by differences in the 
cost of transportation, since the freight rates account for 
but a fraction of the inequalities ; the fact is that wherever 
local refiners can get oil and compete with the trust, prices 
are low, and that wherever competition is absent, extor- 
tionate rates are charged. Most other trusts make a 
similar showing, when the prices of their finished products 
are compared with the prices of the principal raw materials, 
and it is only from competition that consumers can expect 
relief. 

§ 135. When discussion of remedies for the evils of 
trusts began, the thing most often recommended was 
pro osed publicity. It was argued that, if trusts were 
remedies: compelled to disclose the facts about their 
(1) Publicity. ca pitalization, earnings, and price policies, it 
would be possible to secure information that would enable 
us to devise a sovereign remedy. Publicity is greatly 
to be desired, but it happened to be the favorite remedy 
of those who believed trusts to be, upon the whole, a good 
thing for the country, and it was often presented as an 
alternative to doing something to remedy evils already 
known to exist. It was known, for instance, that the 
tariff was one of the conditions that led to the formation 



CAPITALISTIC MONOPOLIES 193 

of certain trusts, but many persons appeared to prefer 
publicity to a reform of the tariff, and even argued that 
the tariff had nothing to do with the trust problems. 
In 1903 the federal government established the Bureau 
Df Corporations, which has undertaken a thorough study 
of the trusts. The result of its investigations has been 
to show conclusively the need of action, and that in direc- 
tions not approved by many of the advocates of pub- 
licity. The investigations of the Bureau and the court 
proceedings in suits brought to dissolve illegal combina- 
tions have merely demonstrated the existence of the evils 
of which complaint was originally made, and have not 
disclosed the benefits about which so much was said 
fifteen or twenty years ago. Publicity will always be 
necessary, but it is a poor substitute for action. 

More is to be expected from a serious effort to grapple 
with the evil of discriminating freight rates. This subject 
will receive further consideration in the fol- ( 2 ) Abolition 
lowing chapter; for the present it is enough discrimina- 
te say that a number of trusts probably receive tion - 
favors from the railroads, and are thereby given a material 
advantage over possible competitors. Until all persons 
receive the same treatment from transportation agencies, 
a free field for competition cannot exist. 

Another remedy for a part of the extortion practiced 
by trusts is to reduce or remove the tariff duties imposed 
upon monopolized products. This is a pro- (3) Re f 0rm 
posal which, naturally enough, has been slow ofthetanff - 
in gaming the support of protectionists. It is said that 
removal of duties would destroy not only the trust, but 
the industry ; yet this is no excuse for refusing to cut down 



194 MONOPOLIES 

the duty to the lowest possible limits. In the case of 
most of the important trusts, it is tolerably certain that 
the complete removal of the duty would have no effect 
except to destroy their power to plunder the public. And 
it is certain that this is the remedy that trust magnates 
most fear; they are willing that people should discuss to 
the full the advantages of publicity, provided that nothing 
is done with the favors accorded by our present tariff. 

It has been proposed, also, to declare unlawful some 

of the tactics now employed by certain trusts in order 

to intimidate competitors. Whenever an inde- 

(4) Preven- > 1 

tion of unfair pendent oil refinery is built, the price of oil in 

competition. tit- 1 i t t 

that locality is at once reduced by the trust 
to unprofitable figures; and such action frequently bank- 
rupts the newcomer. Other combinations have refused 
to sell their goods to dealers who patronized competing 
companies, or have sold only on terms that could leave 
the wholesalers or retailers no profit. In these and other 
ways systematic intimidation has been practiced, and 
any one who contemplates entering an industry controlled 
by a trust must expect to meet this sort of competition. 
The remedy proposed is to apply to the large corporations 
of the present day the same principles of law which have 
long been applied to common carriers and some other 
occupations, viz., to declare that such an enterprise is 
affected with a public interest and must sell to all upon 
equal terms. Such a requirement would make it impos- 
sible for a trust to reduce the price in one locality in order 
to kill competition, while maintaining it at high figures 
elsewhere; if enforced, it would encourage competition 
and make it difficult to maintain a monopoly. Some- 



CAPITALISTIC MONOPOLIES 195 

ching of the sort may yet have to be attempted ; but until 
we learn how to oblige our railroads to accord equal treat- 
ment to all shippers, it is doubtful whether much could 
be accomplished by attempting to bring other industries 
under the laws applicable to public callings. 

A reform of the state corporation laws, by which specu- 
lative promoting should be restricted, the power of 
corporations more carefully limited, and responsible man- 
agement in the interest of stockholders assured, 

. . . (5) Reform of 

is one of the chief desiderata; it is also the state corpora- 
thing most difficult to attain. Some of the 
states are ready to impose upon corporations all needful 
restrictions, but others will undertake nothing of the sort, 
preferring rather to encourage the incorporation of all 
kinds of companies under their lax laws for the sake of 
the large fees that can be obtained in this manner. In 
time the evil results of having forty-five different kinds of 
corporation law in the United States, and the fact that 
a sort of Gresham's law sends corporations to the states 
where the standards are lowest, may lead our people to 
demand uniform and safe legislation; but there is no 
prospect of such a result being attained in the near future. 
In view of this fact, it has been proposed that Congress 
should establish a federal corporation law for companies 
engaged in interstate business. Generally % . , a , 

° m J (6) A federal 

it has been recommended that incorporation corporation 
under this law should be voluntary; but the 
United States would have the power, by various indirect 
means, 1 to compel every concern that desired to engage 

1 It might, for instance, levy a tax of ten per cent on the gross 
receipts of all state corporations carrying on interstate commerce. This 
would be similar to the tax now levied on the notes of state banks. 



196 MONOPOLIES 

in interstate business to take out a federal charter. The 
principal objection to this proposal is that it would transfer 
to national control a large share of the whole business 
of the country which has been subject heretofore to state 
authority, so that it would be a formidable step toward 
centralization. But, in reply, it may be said that it would 
affect only business that is already national in character 
and cannot be controlled adequately by the laws of the 
several states. It is certainly an anomalous condition 
of things in which three or four states create, under laws 
that permit or even invite fraud, companies that under- 
take to operate over an entire continent; nothing like it 
is tolerated in any other country. The climax of absurd- 
ity is reached in the case of the " tramp" corporation, 
which is forbidden to operate in the commonwealth that 
charters it, and is given a roving commission to prey upon 
the people of other states. The business of the large 
corporations is already national in character and extent, 
and should be regulated by uniform and safe laws. If 
the states do not remedy the evils now caused by their 
own negligence, it is probable that the aid of the national 
government will ultimately be invoked. 

§ 136. The trust problem presents many diverse fea- 
tures which will not allow us to reduce our analysis to a 

conclusions. single formula ; for man Y thin g s ha ve con- 
tributed to the movement toward monopoly 
in recent years, and no single remedy will meet all the 
requirements of the situation. After considerable delay 
and great inconvenience, some of the evils caused by the 
trusts seem to be settling themselves. Speculative pro- 
motion has been brought to an end, at least temporarily, 



CAPITALISTIC MONOPOLIES \<)J 

by the refusal of the public to buy shares of bubble com- 
panies; high prices have attracted large amounts of 
capital into several industries, notably that of iron and 
steel; and competition is beginning to afford some relief 
to consumers. The few men who imagined, only a few 
years ago, that it would be possible to bring all staple 
branches of manufactures under their control are learn- 
ing that it is not an easy matter to stifle competition. 
Except when based upon a natural monopoly of minerals 
and other materials, or in cases where transportation 
facilities can be controlled to their advantage, it is probable 
that the power of trusts will steadily decline, and that an 
increasing proportion of the growing business of the coun- 
try will fall to their rivals. Already one hears less about the 
economies or other beauties of consolidation, and more 
about the weaknesses of mammoth combinations or the 
persistent force of competition. Monopoly has never 
been an agreeable thing for its victims, and a free people 
will not permanently tolerate it. 

FOR SUPPLEMENTARY STUDY 

General: Hadley, Economics, 151-179; Marshall, Economics, 
537-553; Seager, Introduction to Economics, 188-204, 434- 
459, 476-509 ; Taussig, Principles of Economics, II, 397-442. 

Special : Clark, The Problem of Monopoly ; Ely, Monopolies and 
Trusts ; Jenks, The Trust Problem ; Meade, Trust Finance. 



CHAPTER X 

RAILROAD TRANSPORTATION 

I. Railroad Competition and Combination 

§ 137. Railway construction began in the United 

States in 1828, when work was commenced on the first 

section of the Baltimore and Ohio Railroad. 

Tne construc- 
tion of rail- By 1840 there were 27 zz miles of road in the 
roads. 

country, practically all in the Atlantic states 
and consisting of short independent lines radiating from 
Boston, New York, Philadelphia, Baltimore, Richmond, 
and Charleston. 1 During the next decade railroads were 
extended with considerable rapidity, and the movement 
became even more rapid after 1850, so that by i860 the 
railway mileage of the country had increased to 28,010 
miles and the interior of the Mississippi Valley had been 
connected with the Atlantic seaboard. Although checked 
by the Civil War, railroad building was recommenced 
after 1866 on a larger scale than ever before, and, with 
the aid of the national government, the first line was 
pushed through to the Pacific coast. In 1873 tne country 
had 68,484 miles of iron roads; but since then many 
additional lines have been built, so that, in 1904, no less 
than 209,000 miles were in operation. Of late, however, 

1 See Johnson's American Railway Transportation and Scribner's 
Statistical Atlas for maps showing railroad construction by decades, 

198 



RAILROAD COMPETITION AND COMBINATION 199 

the rate of growth has decreased, and the new construction 
has been confined very largely to piecing out existing 
systems, laying double tracks, or building short branches. 
With the present needs of the country tolerably well sup- 
plied, our mileage is nearly ten per cent greater than that 
of all Europe, and equals about two fifths of the total for 
the entire world. 

§ 138. The early railways were built, much as trolley 
lines have been during the last decade, as local roads and 
chiefly by local enterprise. The scantiest character of 
provision was made for through traffic, and earl y roads - 
it was necessary for a long time to transship freight 
at each terminal point where it passed to another line 
of road; while passengers were obliged to change cars 
with equal frequency. Between such cities as Albany 
and Buffalo, for instance, there were originally as many 
as ten or eleven different roads, each run in its own way 
and handling through traffic by the most complicated 
and embarrassing methods. 

In time, connecting lines were obliged to cooperate 
with each other for the purpose of interchanging business, 
agreements were effected by which through „ . . 

jo Beginning 

trains could be run, and fast- freight lines were of railway 

, . , cooperation. 

organized to own cars, collect freight, and 
arrange for the convenient dispatch of long-distance traffic. 
Between 1850 and 1870 an increasing degree of cooperation 
was reached by connecting lines, and the service which 
railways could render the country was vastly enlarged. 
In this manner, during the period just mentioned, a rapidly 
growing business between the Mississippi Valley and 
the Atlantic seaboard was developed. 



200 RAILROAD TRANSPORTATION 

§ 139. Meanwhile the combination of short connect- 
ing roads into trunk lines had begun. In 1853 the New 
York Central was formed by the consolidation 

Trunk lines. . . 

of the various roads between Albany and 
Buffalo ; and sixteen years later the Hudson River Rail- 
road was added to it, securing a connection with the 
city of New York. A similar process went on elsewhere 
during the fifties and sixties until, by 1870, there were a 
number of railroads that operated from 200 to 1000 miles 
of line. Between the Atlantic seaboard and points on 
Lake Erie and the Ohio River, the New York Central, 
the Erie, the Pennsylvania, and the Baltimore and Ohio 
roads were reaching out for western business; while in 
the Mississippi Valley various trunk lines had established 
through service between Chicago and the terminals of 
the eastern roads, or had pushed out into the West and 
Northwest and even to the Pacific coast. 

§ 140. The next step in railway combination was the 
union of eastern roads with those in the Mississippi Valley. 
Railway By purchase or lease, the New York Central, 
systems. foe Pennsylvania, and the others secured 
control of lines that gave them entrance into Chicago 
and St. Louis. Thus our first railway systems were de- 
veloped. These consisted of a number of different com- 
panies united under a single management and operating 
several thousand miles of road, some of it owned in fee 
by the parent corporation, other portions controlled by 
purchase of stock, others by lease, and still others con- 
sisting of roads built and financed by the parent company 
for the purpose of rounding out its system. By 1890 
some of the largest systems controlled from 4000 to 5000 



RAILROAD COMPETITION AND COMBINATION 201 

miles of road, consisting sometimes of parallel lines, but 
to a larger extent representing a union of connecting 
railways. 1 

§ 141. This process not only increased the size of the 
railways, but it altered materially the character of their 
operations. The original local lines had' 

r .... The growth 

enjoyed a monopoly in their respective dis- ofcompeti- 

. . . : . -ill tion - 

tncts, competition being possible only at a 

few points where rival roads met or water transportation 
was available. But the trunk lines could compete with 
each other for through traffic, which had grown to very 
large proportions, and the sharpest rivalry soon developed. 
For a few years prior to i860 the eastern trunk lines were 
bidding for western business, and their rivalry was greatly 
intensified when, in 1869, the Pennsylvania and New 
York Central secured firm control of Chicago connec- 
tions. "In 1868 rates from Chicago to New York stood 
at $1.88 per 100 pounds for first-class goods, and $0.82 
for fourth class. In the summer of 1869 they fell, under 
the stress of competition, to a common rate of $0.25 per 
100 pounds on all classes." At that time the new charges 
were ruinously low, and accordingly rates advanced 
to a materially higher level from 1870 to 1874. But in 
the latter year the Baltimore and Ohio secured entrance 
into Chicago, and a Canadian line entered the field. 
Immediately a new period of cut-throat competition began, 
which carried first-class rates down to $0.25 per 100 

1 West of Chicago and St. Louis, however, the great systems radiated 
from these centers, and consisted of a number of arms reaching out into 
the grain regions, where most of their freight was secured. Cf. Hadley, 
Railroad Transportation, 86. 



202 RAILROAD TRANSPORTATION' 

pounds, and fourth-class to $0.16. This warfare was 
brought to an end in 1877 by the establishment of a pool, 
a device which had already been employed in other parts 
of the country in order to meet similar conditions. 

§ 142. In the railroad pool the through, or competitive, 
traffic was divided between the various roads in certain 
proportions ; or else, without actually diverting 
freight from one line to another, the revenue 
which accrued from competitive business was apportioned 
in some manner that was considered equitable. By this 
means the inducement to cut established rates was par- 
tially removed, 1 and freight charges could be maintained at 
profitable figures. The agreement formed by the trunk 
lines in 1877 was maintained with more or less success 
until 1 88 1, when it was broken by a dispute concerning 
the comparative rates charged from Chicago to the various 
eastern seaports. The pool was subsequently renewed, 
and with varying fortunes continued until 1887. In other 
parts of the United States, also, similar arrangements 
were maintained with more or less success, so that the 
general outcome of the sharp competition which had 
arisen about 1870 had been to drive the railroads into 
that form of combination known as the pool. 

The great weakness of the device arose from the fact 
that the courts held that pooling contracts had the effect 
of * restraining trade and were contrary to public policy, 

1 Pools did not wholly remove the inducement. They were established 
for definite periods of time, and at their expiration a new allotment of 
traffic or revenue was necessary in order to continue the arrangements. 
Roads dissatisfied with the amount of business or receipts allotted to them 
would often cut rates secretly in order to increase their traffic to a point 
that would force the pool to grant them a larger allotment in the future. 



RAILROAD COMPETITION AND COMBINATION 203 

so that such agreements could have no legal standing 
and could not be enforced as valid contracts. It fol- 
lowed that pools could have no more strength Legal status 
than might arise from the appeal which they ofthe P° o1 - 
could make to the interest or good faith of the members. 
It usually proved difficult to satisfy all the parties to 
pooling agreements, and some roads, especially the weaker 
ones, were constantly tempted to violate their pledges. 
By means of extra-legal penalties, such as fines, a certain 
amount of discipline was maintained; and various im- 
provements in organization and management made some 
of the later pools much stronger than the earlier. 

Here matters hung, when, in 1887, Congress passed 
the Interstate Commerce Law which prohibited all pooling 
contracts. This action was followed by a Pooling pro- 
reorganization of the various railway associa- hlbited - 
tions, by which it was sought to eliminate the feature of 
pooling and yet hold the members together in such a 
manner as to prevent a renewal of rate cutting. Traffic 
associations, therefore, under various names and forms 
of organization, maintained their existence; and endeav- 
ored, with varying success, to prevent disturbances of 
rates. In 1897 the Supreme Court decided that the Trans- 
Missouri Freight Association, formed for the professed 
purpose of "establishing and maintaining reasonable 
rates, rules, and regulations," was an illegal combination 
to restrain interstate commerce, such as had been pro- 
hibited by the Anti-Trust Law of 1890. At the time, 
this decision was thought to be a final blow at the railroad 
pool; but it appears that traffic associations of one sort 
or another continue to exist and to exercise some control 
over railway rates. 



204 RAILROAD TRANSPORTATION 

§ 143. The earliest railway combinations had taken 
the form of unions of connecting roads, or of radiating 

lines that belonged naturally to one parent 
roadconsoii- stem. The pool, however, was an attempt 

to secure united action between parallel, or 
competing, railway systems; it was designed to regulate 
or do away with competition. Prior to 1870 the result 
of combination had been to intensify, or even to create, 
competition; since that date its consequence has usually 
been to diminish or destroy it. Whether the pool would 
have proved a final adjustment of the relations of com- 
peting lines cannot be determined with certainty, but 
it seems probable that in time various causes would have 
led to the establishment of a closer and more permanent 
union of parallel roads. As it was, however, the law of 
1887, by prohibiting pooling, turned the attention of rail- 
way managers to other methods of controlling competi- 
tion and accelerated very greatly the process of consolida- 
tion. The pool was illegal; but there was nothing to 
prevent one road from securing control of a competing 
line by lease, by purchase of stock, or by new methods 
which were devised. 

In some cases the same group of capitalists secured 
control of competing lines, without attempting a formal 
™ ^ , * consolidation ; in others, different groups of 

Methods of ' or 

consoiida- magnates effected an interchange of holdings 
of stock and of directors, thus securing a " com- 
munity of interest." Finally the device known as the 
holding company was resorted to, and might have been 
very widely employed if the courts had not decided that 
the famous Northern Securities Company, formed to 



RAILROAD COMPETITION AND COMBINATION 205 

hold the stock of the Northern Pacific and Great Northern 
railways, was an illegal combination under the terms of 
the Anti-Trust Law of 1890. How this decision will 
affect certain other holding companies cannot be deter- 
mined at the present time; but it will not do more than 
retard slightly the unification of railway interests. The 
holding company would have been the most popular 
device, since it would have enabled a few magnates to 
control vast properties with the smallest investment in 
their securities (§ 41). Yet there is nothing to prevent 
capitalists from bringing competing railroads under their 
control, or establishing a community of interest with the 
owners of other great railway systems. 

Prior to 1890, as we have seen, 5000 miles of line were 
the most that had been brought under the control of a 
single management; since that date, the com- 

. to to • ,. . Results of 

bination of competing lines has given us great consoiida- 
railway systems that operate from 10,000 to 
22,000 miles. In 1902 there were nineteen systems which 
controlled 165,000 out of the 203,000 miles of railroad in the 
United States; and of these, the eight largest controlled 
129,000 miles, or two thirds of the total mileage of the 
country. 1 Then, too, more or less close relationships are 
known to exist between several of the nineteen great 
railway systems ; so that no less than 82,000 miles of road 
are now controlled by interests which seem to have come 
to an understanding with one another. It is a striking 
fact that, since 1890, consolidation has proceeded very 

1 For descriptions and maps of the great railway systems, see Johnson, 
American Railway Transportation, 52-68 ; also The Wtrld's Work, 
February s 1902; Review of Reviews, August, 1901. 



206 RAILROAD TRANSPORTATION 

largely upon a territorial basis, the purpose and result 
being generally to bring all the important roads in any 
region under one management. Northern New England, 
for instance, falls to one road and southern New England 
to another. The Vanderbilt and Pennsylvania systems 
occupy, respectively, the northern and the southern por- 
tions of the territory north of the Ohio or the Potomac 
and east of the Mississippi, although at some points their 
lines penetrate each other's fields; below the rivers just 
mentioned, we find two other systems which divide most 
of the traffic of the South; and in the Northwest a close 
combination of transcontinental lines has been effected. 1 
The same result has been reached in other countries 
where the roads have remained under private manage- 
ment. This is, perhaps, indicative of what the future 
of railway consolidation is to be. It is very probable, 
indeed, that each section of the country will finally fall 
to the control of a single system which will either operate 
or dominate all the important lines of road. 

§ 144. The general reasons for railway consolidation 

should already be clear to the student who has mastered 

our previous discussion of large-scale produc- 

Reasons for < L ° r 

consoiida- tion and monopoly. In the first place a rail- 
road represents a very large investment of 
fixed capital, and must incur many other charges that are 
fixed and do not vary with the amount of business trans- 
acted. Interest on bonded debt, a large share of the 
taxes paid, salaries to important officials, remain the same, 
whether the amount of business is larger or smaller; the 

1 South and west of St. Louis the situation is not so clearly defined, 
and a number of different systems are yet in existence. 



RAILROAD COMPETITION AND COMBINATION 207 

cost of maintaining the roadbed, track, and structures 
will be somewhat greater when the traffic is heavy, but 
will not be increased proportionately, by any means; 
while the actual expense of handling freight and moving 
trains is about the only element that will vary with the 
volume of business. 1 For this reason it is better for a 
road to accept traffic at any price that will more than meet 
the cost of handling and moving it — even though the 
surplus above variable expenses is far less than enough 
to cover the full amount of the fixed outlays fairly charge- 
able to it — rather than to lose the business and earn 
nothing whatever toward meeting the fixed charges (§ 69). 
Therefore, whenever the competition between parallel 
lines becomes intense, freight rates fall to exceedingly low 
figures, and the struggle that ensues is not inappropriately 
described as a cut-throat contest. Moreover, unlike a 
store or factory, a road that is bankrupted by its losses 
does not go out of existence; but it passes into the hands 
of a receiver, and continues to compete for business, often 
more recklessly than before. In the railway industry, 
therefore, competition is likely to entail severe losses, 
and to drive rival lines into some form of combination. 

In the next place, since the service which railways offer 
can be utilized only in connection with an expensive plant, 
the construction of a parallel line involves a wastes of 
needless duplication of facilities in many in- com P etltlon - 
stances and is not desirable, even from the point of view 
of the public. It was originally supposed that railroad 

1 Even here, by loading cars to their maximum capacity, and increasing 
the size of a freight train, a larger volume of business can be handled at a 
iower average cost. 



208 RAILROAD TRANSPORTATION 

charges could be kept at a fair level by competition; and 
that, if a company already in the field exacted excessive 
rates, relief could be secured by chartering a rival road. 
In this way millions of dollars have been wasted in build- 
ing unnecessary lines; yet the drift toward consolidation 
has not been checked, since ultimately the rival companies 
have found it advantageous to combine. Consolidation, 
in all such cases, enables companies to reduce expenses 
and improve facilities; and it may be considered the 
inevitable outcome of attempts to secure competition. 

Finally, it cannot be doubted that another motive for 

consolidation has been the desire to secure monopoly 

power. A railroad, as we shall see, can never 

Monopoly. 

possess an absolute monopoly; for, except 
over local business, its power to control rates is limited 
in various ways. But between a rate that will yield a 
fair return upon the capital actually invested, and a charge 
that will enable a company to pay the highest possible 
dividends, there is often a striking difference; and the 
monopoly profits that may be derived from combination 
have been one cause of the movement in that direction. 
For this reason every step in the growth of monopoly in the 
transportation industry has intensified the public demand 
for governmental control over the railways, a problem 
which was never so important as it is to-day, and one which 
will require careful consideration in a subsequent part 
of this chapter. 

II. Railroad Rates 

§ 145. Although, as we have seen, it was originally 
supposed that the chief work of the railway would be the 



RAILROAD RATES 209 

transportation of passengers, the event has proved that 
the freight service far exceeds all the other branches. In 
1 910, for instance, the railroads of the United Freight 
States earned $1,925,500,000 from freight, service - 
$628,900,000 from passengers, $116,100,000 from mail 
and express business, and $80,100,000 from miscellaneous 
sources. Thus it appears that about three quarters of 
the total receipts of American roads come from the trans- 
portation of freight. 

Even more important than the financial aspect of this 
branch of traffic is the influence which the freight service 
exerts upon the business of the country. It is Freight 
desirable, of course, that people should be able rates " 
to travel where they will at reasonable rates ; but passenger 
fares are of far less economic consequence than the rates 
charged for carrying commodities. Freight charges are 
an integral part of the cost of producing all goods that 
are carried by railways, and are felt by every person in the 
community; in fact, their universality and inevitableness 
have led many writers to the conclusion that they resemble 
taxes. Passenger rates, on the other hand, enter to a much 
smaller extent into the cost of conducting business enter- 
prises, and have far less effect upon productive industry. 

Further still, freight rates not only affect all consumers, 
but go far toward determining the fortunes of producers. 
A difference of a quarter or an eighth of a 

^ t ° The influence 

cent in the cost of transportation may have of freight 
the effect of localizing production in one region 
instead of another; while if railroads are permitted to 
discriminate between persons, freight rates may destroy 
the business of one man and build up that of some other. 



210 RAILROAD TRANSPORTATION 

Localities that are fortunate enough to enjoy access to 
water routes are somewhat less dependent on this factor, 
but elsewhere the person who adjusts freight tariffs pos- 
sesses what may prove the power of life and death over 
the majority of producers. It is for these reasons that the 
question of freight rates has come to be regarded as the 
most important part of the railroad problem. 

§146. When the first railways were constructed, it 

was supposed that the charges for carrying persons or 

goods would be adjusted readily enough upon 

Rate-making. & .„ M ,.',., , ■ « ™ 1 

a uniform mileage basis, like the tolls collected 
for the use of turnpikes or canals; and various attempts 
were made to enforce such simple tariffs. Here, again, 
original theories had to be abandoned after a brief trial, 
especially in the case of freight charges. In the first place, 
it was soon perceived that bulky products would not bear 
the same rates as goods which possessed great value in 
small bulk. If a road should undertake to charge as much 
for hauling lumber or grain or stone as for carrying fur- 
niture or dry goods, the bulky articles would never be 
carried at all; whereas, if it should charge no more for 
the latter commodities than it must concede to the former, 
the total earnings would little more than cover the cost of 
operating trains. Obviously tariffs must be adjusted in 
some manner to the value of the articles carried ; and the 
result has been, in the United States, the development of 
elaborate systems of freight classification, 1 by which the 
railways endeavor to adjust their charges to what the 
traffic will bear. 

1 See Johnson, Railway Transportation, 113 et seq., for a description of 
the three systems of classification now in force in the United States. 



RAILROAD RATES 211 

As soon as the uniform system of tolls was abandoned, 
the adjustment of freight rates became an exceedingly 
intricate problem. In the first place, it would itscompiex- 
be impossible, even if it were desirable, to lties ' 
pay much consideration to the cost of transporting each 
particular commodity. Railroads transport thousands 
of different articles in the same freight train, or even the 
same cars; and no one can possibly compute the share of 
the total expenses that is fairly chargeable to each article. 
It is possible to ascertain with tolerable accuracy the cost 
of making up and running a freight train loaded with a 
single commodity; but if different articles are carried, it 
is not practicable to determine what precise part of the 
total cost should be attributed to each. 

The situation is rendered the more peculiar by the fact 
that so large a part of the total expenses of a railroad is 
fixed and does not vary with the volume of Different 

J m classes of 

traffic that is secured. The cost of operating traffic, 
trains is the element of expense which comes the nearest 
to varying in proportion to the amount of freight carried; 
and even here the correspondence is not exact, since a con- 
siderable amount of additional business can be accommo- 
dated by filling cars to the limit of their capacity or by 
increasing the size of the freight train, without a propor- 
tionate increase of expense. It follows from this circum- 
stance that it is profitable for a road to carry cheap and 
bulky products for anything more than the actual cost of 
handling the goods and moving the cars, even though the 
charge does not cover all of the fixed expenses, theoreti- 
cally but not practically, attributable to every commodity 
transported. If something can be secured from low- 



212 RAILROAD 1 RANSPORTATIOJV 

grade traffic toward meeting a part of the fixed expenses, 
even though it be less than the full amount fairly charge- 
able, just so much less will need to be obtained from 
commodities of a higher grade. Such an adjustment of 
rates constitutes a discrimination against the latter class of 
goods; but, if the road could not secure anything from 
low-grade traffic, it would be necessary to obtain still more 
from traffic of a higher grade. For this reason, neither 
the producer nor the consumer of the latter is injured by 
the concession made to the former; on the contrary, by 
reducing rates to a point that will enable bulky goods to 
be transported considerable distances, the services of the 
railway to the community are increased and all classes of 
persons are benefited. 

Not only is it impossible for a road to charge a uniform 
rate for all classes of freight, but it has not proved prac- 
Locaiais- ticable to adjust the rate for any single com- 
criminations. mo dity on a un if rm mileage basis. At various 
points along the line of any railroad, or at its terminals, 
competition is likely to be encountered from other railways 
or from water routes. Unless its rivals are restrained 
from offering low rates between competitive points, the 
road must either reduce its charges at such places or lose 
all its competitive traffic. And if, as it would naturally do, 
it makes the necessary concessions at these points, com- 
petitive traffic will be carried at lower rates than similar 
business passing between way stations served by no other 
line. Thus it comes about that freight will be carried 
from one end of a line to the other at even a lower rate 
than is charged for traffic which is carried to some inter- 
mediate point, and in this way many local discriminations 



RAILROAD RATES 213 

arise. Shippers at the way stations who pay the higher 
charges not unnaturally look upon such a condition of 
affairs as a grievous hardship; but, if the discrimina- 
tions in favor of the competitive points are no larger than 
the rivalry of other roads makes necessary, they are both 
justifiable and inevitable. Through lines, at whose ter- 
minals competition must be encountered, could not be 
built if they were allowed to charge no more for local 
traffic than for competitive. If local rates should be re- 
duced to the level of those granted to competitive points, 
the road could not make any money; while if the rates 
for competitive traffic were raised to the level of those 
charged for local, none of this business would be secured. 
As a matter of fact, if something can be secured from com- 
petitive business, the road can afford to carry local traffic 
for somewhat lower rates than would have to be charged 
otherwise; local charges, therefore, are not higher, but 
may be lower, on account of the fact that competitive 
traffic is handled at reduced prices. It is true that the 
discriminations in favor of junction or terminal points tell 
against the business of the way stations ; but the railroad 
merely accepts existing inequalities of situation, and does 
not create them. A town enjoying access to water routes 
had cheaper transportation before the road was built; 
and will continue to have it afterward, even if the new 
carrier refrains from bidding for competitive traffic. So, 
too, the construction of more than one line between 
two points creates an inequality of situation, for which 
neither road may be responsible, and to which freight 
rates must be adjusted. 

Besides the competition of rival routes, the competition 



214 RAILROAD TRANSPORTATION 

of markets affects railway charges in a striking manner. 
Products of any kind that are carried to the same market 
competition fr° m different places of production must sell 
of markets. f or aD0U t the same price. Since the producer 
can obtain for his goods no more than the market allows, 
the railway cannot charge him very much more than is 
exacted by roads that serve producers in other sections of 
country without destroying his business and losing his 
traffic. If Georgia peaches are to be sold in Philadelphia 
and New York, or Alabama iron is to be marketed in 
Pennsylvania, the goods brought from the South must be 
carried at lower mileage rates than those procured from 
nearer sources of supply. Even if there is only a single 
road or railway system in each section of the country, 
competition for markets will still continue; and it is for 
this reason that a road can never have more than a partial 
monopoly. 

Oftentimes, however, charging what the traffic will bear 
has passed into charging what it will not bear, and railway 
unjust dis- managers have adjusted rates in an arbitrary 
criminations. and un j ust manner . They have discriminated 
in favor of places in which they or their associates were 
personally interested, and in favor of business enterprises 
in which they had a personal stake. Worst of all have 
been personal discriminations between shippers who were, 
upon the principles above stated, entitled to equal or sub- 
stantially equal treatment. The Standard Oil Monopoly 
was, in its earlier days, built up almost wholly by outrageous 
discriminations in its favor; and to-day, it is very doubt- 
ful whether a competing company will not be ruined if in 
any way the railroads can compass its undoing. The 



RAILROAD RATES 21 5 

monopoly of dressed beef was established in a similar 
manner, unfair treatment of independent miners threw 
the anthracite coal fields into the hands of a few railroads, 
and in many other cases monopolies have been built up 
by means of rebates and unjust discriminations between 
shippers. Specious arguments have been advanced in 
defense of the favors accorded to large producers; among 
other things, it is argued that it costs a railway less to 
handle freight when it is supplied by the train load than 
when it must be gathered up in small consignments. But 
the cost of service is rejected by railway managers them- 
selves as the basis for adjusting freight rates, and it can- 
not be appealed to in support of practices that foster 
monopoly. Charges cannot be adjusted upon a basis 
of absolute uniformity, such as is attained by a system 
of tolls ; but it is possible and highly desirable to elimi- 
nate absolutely all personal discriminations. That it 
costs less to handle a train load than a car load should not 
weigh for an instant against the desirability of allowing 
all producers to use the national highways upon equal 
terms. This is a case in which discrimination is as inad- 
missible as it would be in the adjustment of postal rates, 
even though the latter item is a much smaller factor in 
the cost of production than the charge for transporting 
freight. 

We cannot consider further the intricate problems con- 
nected with the adjustment of railway rates. It has been 
shown that a uniform system of tolls is impossi- 

Summary. 

ble and undesirable, and that basing rates upon 
the cost of each particular service is undesirable and im- 
possible. Freight charges must be adjusted to what the 



2l6 RAILROAD TRANSPORTATION 

traffic will bear; it is necessary to discriminate in favor ot 
bulky products and competitive business; and producers 
cannot be made to pay more than the competition of mar- 
kets will permit. Against these hard facts, restrictive or 
regulative legislation will beat in vain; and a rational 
policy toward the railway must proceed in a full recogni- 
tion of the conditions of the rate problem. 

III. Public Control of Railroads 

§ 147. Prior to 1870 the chief problem connected with 
railways in the United States was that of securing the con- 
struction of the roads needed to handle the exist- 

Early policy 

toward rail- ing volume of traffic and to provide for the future 

roads. . . , . o 

development of the country, bo necessary was 
it for every community or section to obtain railroad facili- 
ties that our various governments, local, state, and national, 
aided construction by grants of land or money; while 
everywhere the disposition of the people was most friendly 
to railway enterprises. The charters of some of the earlier 
roads and occasional statutes placed certain restrictions 
upon profits, or attempted to prescribe systems of tolls, for 
goods and passengers, such as had been arranged for turn- 
pikes or canal companies. In New England, moreover, 
some states established railroad commissions with limited 
powers of supervision and control. But, in general, little 
serious effort had been made to regulate or control the 
railroads of the country; and it seems to have been as- 
sumed that competition would oblige the companies to 
provide good service at reasonable prices. 

§ 148. But a few years after the Civil War the attitude 
of our people toward the railways began to change, and 



PUBLIC CONTROL OF RAILROADS 217 

about 1870 a great deal of dissatisfaction arose in the 
northern part of the Mississippi Valley. After con- 
siderable agitation of the subject, laws, called 
Granger laws, were enacted * in Illinois, Iowa, of a railway 
Minnesota, and Wisconsin, and then in other pr ° em ' 
states, which were intended to correct various abuses that 
were believed to exist. That the farmer had real griev- 
ances cannot be doubted ; not only were rates frequently 
extortionate in themselves, but, still worse, unjustifiable 
local and personal discriminations greatly aggravated the 
situation. Some of the new statutes, however, were un- 
wise and even unjust to the railroads; and it was found 
necessary to repeal them or to amend materially their 
provisions. 

The managers of the railways, when the hostile legisla- 
tion was enacted, went into the courts and endeavored to 
have it declared unconstitutional. They as- The public 
serted that their roads were private enterprises Jj* ranroad 
and that a legislature could no more regulate DUSiness - 
the prices charged or service offered than it could control 
the details of any other business. This position was 
contrary to the well-established principles of the common 
law, by which common carriers were subject to public 
regulation in so far as it might be needed to insure the 
general welfare. And it appears little short of humorous 
when one considers that the very companies that now 
claimed to be purely private enterprises had originally 
asked and received the power to condemn, under right of 

1 These are known as the Granger laws, since they were enacted in 
response to the demand of the Grange, an association that was then wide' 
spread in these states. See Hadley, Railway Transportation, 133-136. 



218 RAILROAD TRANSPORTATION 

eminent domain, the land needed for the construction of 
their lines, upon the theory that they were undertaking 
work of great public utility and importance. In 1877 the 
Supreme Court decided, once for all, that a railway per- 
forms a service that is of public interest; and that, 
although the company remains a private corporation, it 
is subject to legislative regulation. By subsequent deci- 
sions the court has reserved to itself the power of deciding 
what acts of a legislature are to be deemed a reasonable 
and necessary exercise of the supervisory power which it 
is declared to possess, but since that time the public char- 
acter of railway transportation has not been open to fur- 
ther debate. 

§ 149. The most tangible outcome of the Granger 
movement was the establishment of various railway corn- 
state railroad missions in the West and South with power to 
commissions. regu i ate charges and otherwise control the 
transportation industry. Meanwhile, in the East, another 
type of commission had been developed, which possessed 
no power to issue orders to the railways, but was author- 
ized to collect information and make recommendations to 
the legislature. Although appearing to possess greater 
authority, most of the so-called mandatory commissions 
actually accomplished less than the advisory commission 
of Massachusetts. In that state the high character of the 
commission itself, the fact that the railroads were older 
and more stable, and the influence of an alert public 
opinion, resulted in the enactment of beneficial laws or 
the acceptance by the roads of many of the recommenda- 
tions that were made. Under different conditions, how- 
ever, the Massachusetts plan would not have produced a 



PUBLIC CONTROL OF RAILROADS 219 

satisfactory result; and the tendency in recent years has 
been toward giving the state commissions mandatory as 
well as advisory powers. At the present time some 
thirty-two of the states have established commissions 
that exercise more or less control over railroads. 

§ 150. The control which the states attempted to exercise 
by statute or through commissions extended for some years 
to all railroad traffic, interstate as well as intra- , 

' The Inter- 

State; but in 1886 the Supreme Court decided state com- 

that a state could regulate only the latter, the 
former being declared to be subject exclusively to national 
control. This decision took away from the state commis- 
sions a considerable part of their power, and intensified 
greatly the desire for federal regulation of the railways. 
Accordingly, in 1887, Congress enacted the Interstate 
Commerce Law, upon which most later discussions of 
railroad control have turned. 

The act of 1887 applied only to interstate traffic, but 
contained a number of far-reaching provisions. It pro- 
hibited extortionate charges and also all un- Its provi . 
reasonable discriminations between persons, S10ns - 
localities, or different classes of traffic. Then, more spe- 
cifically, it prescribed that no common carrier subject to 
the act should charge more for transporting passengers or 
goods a shorter distance than it received for a longer, the 
conditions being substantially the same and the shorter 
distance being included in the longer. 1 It also prohibited 

1 This had the effect, not of prohibiting local discriminations, but of 
limiting them to such a degree that the competitive point could not actu- 
ally receive a lower rate than the station not favored by competition. Of 
course a local discrimination not great enough to make the charge for a 



220 RAILROAD TRANSPORTATION 

the pooling of freight traffic or of aggregate money earnings 
by railways, with the purpose of obliging the roads to com- 
pete with one another ; in fact, the principle that competi- 
tion can and should control the industry of transportation 
was that upon which the entire law was based. Other 
provisions of the act required publicity of rates and some 
other things which cannot be considered here. Finally 
an interstate commerce commission was appointed to 
enforce the law, and given powers that were supposed to 
be ample for that purpose. This body was to receive 
complaints from shippers or others, investigate them, and 
adjudicate the cases as they might arise; but the rail- 
roads, of course, could appeal from the decisions of the 
commission to the courts of law. The intention of Con- 
gress was that all questions of fact should be studied and 
decided by the commission, and that any legal problems 
that might be involved should be settled by the courts. 

§ 151. The actual results of the Interstate Commerce 
Law fell very far short of the expectations of its framers, 
Results of largely on account of legal difficulties which 
lation. the commission encountered in its efforts 

to enforce the act. When the commission appealed 
to the courts to enforce its orders, or railroads insti- 
tuted suits in order to obtain a modification of them, the 
courts did not accept as final the facts ascertained by 
the commission; but reheard the cases in all details, 
even allowing the carriers to introduce new evidence not 
submitted at the original hearing. The effect of this was, 
on the one hand, to encourage the roads not to make 

long haul less than that for a short haul might be condemned by the com- 
mission as unreasonable under the previous provisions of the act. 



PUBLIC CONTROL OF RAILROADS 221 

a full disclosure of their cases before the commission, 
whereby its authority and efficiency were impaired. And, 
on the other hand, the necessity of rehearing each case in 
all its details, first in the lower courts, then in the higher 
if an appeal was taken, led to much protracted litigation 
which resulted in what was, to all intents and purposes, a 
denial of-relief to shippers. 

Furthermore, the Supreme Court limited very nar- 
rowly the powers of the commission. For a number of 
years after the enactment of the law, the com- „ 

J The powers 

mission, when it found that existing charges ofthecom- 

. mission. 

were unreasonable, undertook in many cases 
to determine what rates would be reasonable. But the 
Court at last decided that the law of 1887 conferred no 
such authority upon the commission, and intrusted it 
with nothing more than the power of deciding whether 
existing rates were reasonable or not. Since the only 
adequate remedy for an unjust rate is the establishment 
of a just one, this decision stripped the commission of all 
real control over railway charges. 

The fate of the long- and short-haul clause of the act 
of 1887 is equally interesting. The law did not prohibit 
charging more for a short haul than a long haul Long an a 
in cases where the conditions were dissimilar ; short hauls ' 
and the commission soon decided that competition of 
water routes or intrastate railroads not subject to its author- 
ity might be sufficient to make the conditions so unlike as 
to justify a lower charge for a long haul. The Supreme 
Court, however, in the test case, held that competition of 
other roads subject to the act was enough to modify the situ- 
ation and justify a lower rate for a longer distance. The 



222 PUBLIC CONTROL OF RAILROADS 

result was that in all cases where any sort of competition 
prevailed, railroads could adjust their charges as they 
pleased, so that the long- and short-haul clause was 
practically of no effect. 

But although in many important matters the Interstate 
Commerce Law proved a disappointment, the act pro- 
other duced a number of excellent results. ■ Greater 

details. publicity of railroad rates was secured, useful 

statistics were collected, the relations of the railroads 
to one another were improved in various ways, while 
the investigations and recommendations of the commis- 
sion tended in a number of directions to secure a better 
adjustment of railway charges. Then, too, the entire 
experiment had great educational value; and made it 
possible to see, more clearly than in 1887, a way out of 
some of the problems presented by federal railway regu- 
lation. 

§ 152. In 1906 Congress enacted another important 
law which greatly strengthened and enlarged the govern- 
Theactof merit's control over railroads. This statute 
I9 ° 6 - placed express companies, sleeping-car com- 

panies, private-car lines, and pipe lines under the control 
of the Interstate Commerce Commission. Then it 
prohibited free passes and made it a misdemeanor for 
any road to give, and any shipper to accept, "any rebate, 
concession, or discrimination." It further prohibited 
a railroad from transporting any article, except lumber, 
that had been mined, manufactured, or produced by 
itself; with a view to preventing carriers from monopo- 
lizing certain industries, such as coal mining, in which 
certain roads had embarked. Most important of all 



PUBLIC CONTROL OF RAILROADS 223 

was a further provision, that the Interstate Commerce 
Commission shall hereafter have power to "determine 
and prescribe" what is a "just and reasonable rate" for 
a carrier to charge. Finally, the commission was given 
enlarged powers to secure uniform and honest account- 
ing, as well as to enforce greater publicity and stability 
of rates. 

The law of 1906 fared much better in the courts than 
the act of 1887, even though the "commodities clause," 
which prohibited roads from transporting The working 
commodities produced by themselves, was ofthisact - 
greatly weakened by a decision that ownership of stock 
of a company mining coal does not give the carrier road 
such an interest in the coal as the law prohibits. Not- 
withstanding this decision the commodities clause has 
checked the tendency of railroads to enter various indus- 
tries foreign to their proper sphere as carriers. 

In 1910 the "Mann-Elkins Act" extended still further 
the powers of the Interstate Commerce Commission. 
It provided that changes in rates proposed 

by railroads may be suspended by the com- ofigioand 

1913. 
mission, pending investigation of their rea- 
sonableness, and placed upon the carriers the burden of 
proof of the reasonableness of such changes. Under 
this power the commission suspended and finally dis- 
approved certain general advances in freight rates pro- 
posed in 1910. A second important provision of the act 
gave new vitality to the long- and short-haul clause of 
the law of 1887. The interpretation placed upon this 
clause by the courts had practically nullified it, and vari- 
ous Southern and Western States had long complained 



224 RAILROAD TRANSPORTATION 

of discriminations that favored producers and shippers 
in the larger cities and manufacturing districts of the 
East, who enjoyed exceptionally low rates on long hauls. 
Accordingly the new law struck out of the act of 1887 
the proviso that the clause should apply only to hauls 
made under "substantially similar circumstances and 
conditions," and so made the prohibition absolute. It 
then provided that the Interstate Commerce Commission 
may permit carriers to charge more for short than for 
long hauls, thus placing upon that body responsibility 
for deciding some of the most delicate questions of rate- 
making, which involve conflict of both sectional and in- 
dustrial interests. A final provision created a Commerce 
Court to review orders issued by the Interstate Commerce 
Commission, with the purpose of securing more expedi- 
tious and satisfactory adjudication of such matters. 
In 1 91 3, with a view to securing information needed for 
the purpose of determining the reasonableness of rates, 
Congress supplemented previous legislation by an act 
providing for an official valuation of the railroad prop- 
erties of the country. 

§ 153. Federal control of private corporations engaged 
in interstate transportation has presented, and still offers, 
National so manv difficulties that national ownership 
ownership. an j p era ti n of railroads have been proposed. 
It is argued that the country has already been parceled 
out among a few large systems, so that the work of organ- 
izing the business upon a national scale has already been 
largely accomplished ; and it is believed that public owner- 
ship offers in this field all the advantages that are claimed 
for it in the case of municipal industries (§ 122). On the 



PUBLIC CONTROL OF RAILROADS 225 

other hand, purchase of the railways would involve se- 
rious risks, since it would require an investment of some 
$15,000,000,000, while the pressure of the employees for 
high wages and of the public for low charges might make 
the financial results very uncertain. Then, too, it would 
add more than a million men to the existing body of 
federal employees; and, even if civil service regulations 
should be enforced, there would exist here a formidable 
army of voters for whose support the politicians would 
bid, as they appeal now to the holders of military pen- 
sions. Finally, enormous difficulties would probably arise 
in the adjustment of rates and the extension or improve- 
ment of facilities. In the matter of rates, each section 
has interests that conflict with those of other sections, 
while similar conditions arise between industry and in- 
dustry; and in asking for new and improved facilities, 
the same jobbery would appear that to-day attends con- 
gressional appropriations for rivers and harbors or the ex- 
tension of rural free delivery routes. Then, too, it is not 
probable that the railway service would continue to be as 
efficient as it is at present, or that the adjustment of rates 
would be elastic enough to meet the needs of business. 

FOR SUPPLEMENTARY STUDY 

General: Hadley, Economics, 153-158, 171-179, 398-400; Seager, 
Introduction to Economics, 460-475; Taussig, Principles of 
Economics, II, 363-396. 

Special: Hadley, Railroad Transportation, 1-124, 236-258; 
Hendrik, Railway Control by Commission, 92-139; John- 
son, American Railway Transportation, 213-304, 349-407; 
Report of the Industrial -Commission, XIX, 259-484; The 
American Railroad. 



CHAPTER XI 

INTERNATIONAL TRADE 

I. The Foreign Trade of the United States 

§ 154. When ouY present government was established, 

the whole foreign trade of the United States amounted to 

,. M something less than $40,000,000: by i860 it had 

Growth of ° ^ J ' ' J 

our foreign grown to $687,000,000 a year, and in 1892, break- 
trade. . .. . . . _ . . 

mg all previous records, it had risen to some- 
thing over $1,800,000,000. Since the last date our foreign 
commerce has continued to expand until at the present 
time it is valued at $3,576,500,000. Ordinarily exports 
from the United States exceed the goods imported from 
other countries, so that the balance of trade is said to be 
"favorable" ; and of late years the excess of exports has 
greatly increased, having ranged from $300,000,000 to 
$6oo,ooo,ooo. 1 

1 The movement of our foreign trade in recent years is shown by the 
following table : — 

Foreign Trade of United States from 1899-19 n (Inclusive) 



Year 


Exports 


Imports 


Total 
Foreign Trade 


Excess of 
Exports 


1907 . . . 

1908 . . . 

1909 . . . 

1910 . . . 
1911 . . . 


$1,880,851,000 
1,860,773,000 
1,663,011,000 
1,744,984,000 
2,049,320,000 


$1,434,421,000 
1,194,341,000 
1,311,920,000 

i,556,947,ooo 
1,527,226,000 


$3,3i5, 2 72,ooo 
3,055,n5,ooo 
2,974,931,000 
3,301,932,000 
3,576,546,000 


$446,429,000 
666,431,000 
351,090,000 
188,037,000 
522,094,000 



226 



FOREIGN TRADE OF THE UNITED STATES 227 

The principal exports from the United States have 
always been agricultural products, although in recent 
years the proportion of manufactured goods 
has steadily increased. In 191 1 the country 
exported $124,000,000 of breadstuffs, $585,000,000 of 
cotton, and $149,000,000 of meat and dairy products, as 
well as $43,000,000 of tobacco and $19,000,000 of live 
animals. Among the exports of manufactured goods, iron 
and steel products held first place, showing an aggregate 
value of $230,000,000 ; and mineral oils came second, with 
a value of $98,000,000. Copper ingots and manufactures 
of copper supplied $104,000,000 of the exports, cotton 
manufactures $40,000,000, and leather with its various 
products $53,000,000. From 1893 to 191 1 manufactured 
exports steadily rose from $158,000,000 to $907,000,000. 

Our imports consist mainly of food products and raw 
materials that we are unable either to raise at all, or to 
produce in sufficient quantity to meet the demand. Sugar 
was imported in 191 1 to the value of $96,000,000, 

Imports. 

and coffee to the amount of $90,000,000; while 
imports of wool and of vegetable fibers equaled $108,- 
000,000, imports of raw silk stood at $75,000,000, those of 
chemicals and dyes at $95,000,000, and of india rubber 
at^ $92,000,000. Imports of manufactured goods ready 
for consumption amounted in 191 1 to no more than 
$361,000,000 out of total imports of $1,527,000,000, the 
largest ever known in the history of the country. 

§ 155. It is interesting to study the distribution of our 
foreign trade among the various countries with which we 
have dealings. Of our exports, no less than 63.8 per 
cent went to Europe in 191 1, and about 13 per cent to 



228 INTERNATIONAL TRADE 

Canada, leaving less than one fourth of the trade to be 

transacted with South America, Asia, and Africa. In 

Europe, moreover, 44 per cent of the sales 

Our trade r ' ? *tt r ,,,,., 

with various were made to Great Britain and Ireland ; while 
Germany bought about 22 per cent of our Eu- 
ropean exports, and France and Holland about 18 or 
19 per cent. It appears that Great Britain, Germany, 
Canada, France, and Holland purchased in 1911 about 
$1,365,000,000 of the $2,049,000,000 of goods exported 
from the United States. In contrast to this condition, 
our import trade is far more widely distributed. About 
50 per cent of the imports of 191 1 came, indeed, from Eu- 
rope ; but this is a far smaller proportion than was shown 
by our European exports. Twenty per cent o, c the im- 
ports came from Canada and Central America, 12 per cent 
from South America, and 14 per cent from Asia; Africa 
and Oceanica accounted for the remaining 4 per cent. 

The reason for the unequal distribution of exports and 

imports is not hard to discover. Europe needs enormous 

amounts of our breadstuff's and meat in order 

Reasons for 

its present to feed her large population, and draws heavily 
upon our southern states for the materials used 
by her cotton manufacturers ; while the United States has no 
such urgent need for the manufactured and other products 
that Europe has to offer. On the other hand, the sugai^ 
tea, coffee, wool, hemp, india rubber, and other- supplies 
which this country is obliged to procure from foreign 
sources must be sought chiefly in tropical lands or the 
less triickly inhabited parts of the globe. So far as the 
United States and Europe are concerned, it is clear that her 
necessity is greater than ours ; and that we possess, there- 



THE NATURE OF INTERNATIONAL TRADE 229 

fore, a material advantage in trade. This fact has some- 
times encouraged Americans to boastful assertions of their 
superiority and to reckless disregard of the interests of the 
nations who are our best customers ; it should rather lead 
us, by a fair and considerate policy, to cultivate the good 
will of the countries which now purchase so large a part 
of the surplus products of our farms, workshops, and 
factories. 

II. The Nature of International Trade 

§ 156. Merchants sell goods in foreign countries or 
import them from such lands whenever differences between 
domestic and foreign prices make it profitable Foreign trade 
to do so. The individual exporter or importer lsbarter - 
looks upon his transactions as exchanges of goods for 
money, or money for goods, as the case may be; and, 
from his point of view, international trade consists of the 
exchange of commodities for money. Yet the matter is 
not so simple as this, and the truth is that foreign commerce 
is a process of barter in which, for the most part, exports 
pay for imports. 

This is a hard saying for many persons, and it is desirable 
to present a few facts which prove its truth beyond all per- 
adventure. From 182 1, when figures of specie statistical 
exports and imports are first available, down pr00f ' 
to 1896, the total movement of merchandise to or from the 
United States aggregated more than $53,000,000,000; 
while the total shipments of gold and silver amounted 
to less than $5,000,000,000. For the last generation gold 
has been the money used in international payments; and 
therefore a considerable part of the silver included in the 



230 



INTERNATIONAL TRADE 



figures of the specie movement should be regarded as 
merchandise rather than as money. For the five years 
ending in 191 1 the aggregate shipments of merchandise 
and gold (exported and imported) have been as follows : — 



Year 


Merchandise 


Gold 


1907 . . . 

1908 

1909 . 

1910 

1911 


$3,315,000,000 
3,055,000,000 
2,974,000,000 
3,301,000,000 
3,576,000,000 


$165,900,000 

220,700,000 

135,500,000 

161,900,000 

96,100,000 




$16,221,000,000 


$780,100,000 



It appears that exports and imports of gold averaged no 
more than 4.8 per cent of the aggregate shipments of mer- 
chandise, and that over 95 per cent of our foreign trade 
occasioned no payments in money. 

§ 157. The first explanation of this fact is that, in for- 
eign trade, as in domestic, it is inconvenient and expensive 
This fact to handle money when some instrument of 
explained. cre dit can be made to do the work of exchange. 
Bills of exchange, therefore, are used in the larger number 
of international payments, and money is employed only 
in the settlement of balances. If imports exceed exports, 
gold may be exported to pay for the unfavorable balance 
of trade, while an excess of exports may bring gold into 
the country; but, in the larger proportion of cases, goods 
shipped in one direction provide the credits used in set- 
tling for commodities that move in the other. 

But there is an underlying, and more important, reason 



THE NATURE OF INTERNATIONAL TRADE 23 1 

for the fact that money is little used in international trade. 
Shipments of money, whether outward or inward, tend to 
affect the general level of prices and to limit themselves au- 
tomatically to comparatively small proportions. 
An outflow of money in payment of an excess of money are 
of imports decreases the currency in circulation, 
and tends to lower prices. Such a change in conditions 
makes the country a poor market for foreign products, 
while at the same time it decreases the cost of producing 
domestic products; and the result is that imports will 
tend to decrease, and exports to expand. The change in 
the movement of trade effected in this manner must con- 
tinue until the balance ceases to be unfavorable, when 
gold shipments will cease of their own accord, since exports 
now balance imports. On the other hand, an excess of 
exports which brings money into a country tends to raise 
prices, to check purchases made by foreigners, and to 
increase sales of foreign products. As soon as these 
results have been produced, exports and imports of com- 
modities must tend to an equilibrium, and the inflow of 
money will come to an end. 

§ 158. In the foregoing discussion it has been assumed 
that the only financial transactions between countries are 
those occasioned by the purchase of merchan- T A 4 . , 

J r International 

dise and the payments made on this account, movements of 

. capital. 

The fact is, however, that many operations are 
constantly carried on which affect our problem. In the first 
place the older and richer nations of Europe have invested 
considerable capital in foreign countries, England, in partic- 
ular, having made enormous investments in all parts of the 
globe. When such a transaction occurs, the investor or 



232 INTERNATIONAL TRADE 

lender must remit the amount of his investment; but 
thereafter the borrower must remit the interest charges. 
In this manner a country is at first a debtor for the capital 
which its citizens invest abroad, and is thereafter a cred- 
itor for the annual interest payments. Each year England 
has credits for some hundreds of millions of dollars of 
interest money; while the United States, a younger coun- 
try which has received perhaps $6,500,000,000 of foreign 
capital, is a debtor for interest on such capital. 

Particularly important in influencing the course of the 
foreign exchanges are the movements of the capital of inter- 
__ . national bankers. If the discount rates in New 

Movements 

of banking York and London are low while they happen 
to be high in Paris, the international banking 
houses will ship a part of their capital to the latter city 
in order to take advantage of the better terms which the 
money can command. Sometimes, when a country is a 
debtor on other transactions and would normally begin 
to export gold, a rise in the interest rates will induce 
foreign creditors to invest the amounts due them instead 
of calling for instant remittance. In this manner, by 
offering a high rate of interest, a country can frequently 
borrow funds which must otherwise have been sent abroad 
in order to satisfy a balance of indebtedness. 

Other international debts are incurred for ocean freights. 
A country must meet in some way the cost of carrying 
ocean its imports; and, unless its own ships perform 

freights. ^jg wor ]^ foreigners must be paid for the serv- 
ice. On the other hand, if a country's ships carry ex- 
ports to foreign lands, they will earn considerable sums 
that must be paid by foreigners. England, besides hand- 



THE NATURE GF INTERNATIONAL TRADE 233 

ling most of her imports in her own vessels, does a large 
amount of carrying for other countries, with the result 
that she is each year a creditor for the amount of the 
earnings of her merchant marine. The United States, 
however, imports but few goods in American ships, and 
earns little by carrying goods for other countries; so 
that it is regularly a debtor for some $20,000,000 or 
$30,000,000. 

Again, persons who travel abroad make expenditures 
which must affect the condition of the exchanges. The 
United States in recent years has incurred Travelers' 
large debts for the sums spent by American ex P endltures - 
tourists in excess of what foreigners have expended in 
this country. At the present time, this item must amount 
to fully $170,000,000; while remittances by immigrants 
to relatives and friends in foreign countries were esti- 
mated at $150,000,000 in 1 910. Other factors still might 
be enumerated, but we have space to mention only one. 
London serves as a world's clearing house for the settle- 
ment of international debts, and the bankers of that city 
receive each year considerable sums for this and similar 
services. 

The net result of all these factors is that Great Britain 
is a creditor nation, and receives annually enormous credits 
for interest on her foreign investments, freights 

Conclusions. 

earned by her ships, and the services rendered 
by London bankers. In 191 1 her imports aggregated 
£680,559,000 and her exports £557,003,000, the unfavor- 
able balance of trade amounting to £123,556,000. The 
vast excess of imports represented the various debts that 



234 INTERNATIONAL TRADE 

other countries owed her, and, in spite of it, imports of spe- 
cie exceeded exports by £6,000,000. On the other hand, 
the United States in 191 1 exported goods to an amount 
that exceeded by $522,094,000 the imports brought in from 
other lands, and imported only $32,200,000 of specie in 
excess of what was exported. The favorable balance of 
trade represented chiefly the balance of obligations in- 
curred for the various invisible elements x that enter into 
the foreign exchanges. Great Britain, Germany, France, 
Holland, Belgium, and Italy ordinarily have unfavorable 
balances of trade ; while, besides the United States, Russia, 
Argentine Republic, Canada, Egypt, and Mexico show an 
excess of exports. The former countries are creditors of 
the rest of the world, and receive their annual dues in the 
form of an excess of imported merchandise ; the latter are 
debtors and must send out an excess of exports in order 
to meet their foreign obligations. 

§ 159. It was once thought that the object of foreign 

trade should be to secure a large favorable balance, which 

should bring money into a country; and for a 

the balance long time the various nations of Europe regu- 

of trade. , ° . , r . . . & 

lated commerce in a number of injurious ways, 
endeavoring to make their exports exceed imports. Thus 
arose the theory of the balance of trade which controlled 
the commercial policy of the world until Adam Smith and 
writers of less note demonstrated its absurdity. Look- 
ing upon commerce as an exchange of products useful to 
both parties, Smith showed that the restrictions enforced 

1 The invisible elements are those which do not appear in tables of 
exports or imports of commodities. They have been enumerated in 
§158. 



THE NATURE OF INTERNATIONAL TRADE 235 

by governments had the effect of preventing mutual serv- 
ice; and at the same time, he pointed out that money 
would inevitably be distributed over the world in the pro- 
portions required by the trade of each country, and that 
one nation could not hope to secure and retain more than 
its proper quota. Since his day economists have ceased 
to worry over the imaginary evils of an unfavorable bal- 
ance of trade. 

§ 160. Having grasped firmly the proposition that in- 
ternational trade is in its essence barter, we may proceed to 
a second principle which relates to the direction _ ' 

r r International 

that this trade may take. Within any small area, trade bas ed 

upon relative 

capital and labor will migrate freely to the local- advantages 
ities that afford the best facilities for conducting 
any industry; and production will be localized in those 
districts which offer the greatest advantages for raising or 
manufacturing each commodity. When exchange begins, 
each community will sell the things that it can produce 
with the smallest absolute expenditure of labor and capital 
for the things in which other communities have the advan- 
tage ; while if any district is outstripped by some other in 
the production of every commodity, it will be deserted 
gradually by laborers and capitalists, and its industries will 
disappear. Within a small area, therefore, commerce will 
be based on the absolute advantages which each community 
possesses for the production of various commodities ; and 
all articles will be produced in the places that can supply 
them with the smallest outlay of labor and capital. But 
capital and labor do not move with perfect freedom from 
country to country; for distance, differences in language 
and religion, and varying customs and political institutions 



236 INTERNATIONAL TRADE 

all stand in the way. Although modern conditions have 
facilitated the process of migration, it is true, neverthe- 
less, that only a part of the surplus labor and capital of 
older countries finds its way into other lands; and that 
the people of each nation are content to make the best of 
such resources as they have rather than expatriate them- 
selves. For this reason, it will appear -that international 
commerce is based upon relative, not absolute, advantages 
of production. 

By an absolute advantage is meant the ability to produce 
a commodity with the smallest expenditure of capital and 
Relative ad- labor. One country might conceivably have an 
(urthTcon- absolute advantage over another in every branch 
sidered. f productive industry. A relative, or com- 

parative, advantage, however, exists only in relation to or 
comparison with some other industry or industries in the 
same country. Thus the United States might have an 
absolute advantage of fifty per cent over England in the 
production of wheat, one of thirty per cent in mining iron 
ore, and one of twenty per cent in the manufacture of 
steel billets ; in such a case American wheat raisers would 
have a comparative advantage over American producers 
of iron ore and steel rails, while our iron miners would 
have a comparative advantage over manufacturers of 
steel. Now, if no other factor entered into the case, the 
labor and capital of both countries would be most effi- 
ciently employed if the United States specialized in the 
production of wheat, and Great Britain in that of steel; 
and this is the manner in which things would work them- 
selves out in the trade between the two nations. 

This can be explained most readily by assuming that 



THE NATURE OF INTERNATIONAL TRADE 237 



two countries, say England and the United States, produce 
eight and only eight commodities; and that 

& . Illustration. 

when commerce begins between them, the 

eight articles are selling for the following prices in each 

country : 1 — ■ 



Commodities 


Prices in 
England 


Prices in 
United States 


One ton steel rails . 


$14.00 


$20.00 


One pound wool 






•15 


.20 


One yard carpet 






I.20 


2.00 


One yard cotton cloth 






.12 


•15 


One bushel wheat . 






.90 


.60 


One bushel corn 






.70 


.50 


One pound leather , 






.20 


•15 


One pound pork 






•15 


.07 



Conclusions. 



Under the conditions here represented, American mer- 
chants will find a profit in importing the first four commod- 
ities from England, and in exporting to that 
country the last four articles on the list. Trade 
may proceed for a time upon this basis until at last it 
appears that, at the existing scale of prices, exports and 
imports cannot remain equal in volume. If, then, an 
excess of imports develops, the United States will begin 
to export gold to England in order to settle an unfavorable 
balance of trade. The movement of specie must continue 
until prices fall in this country and advance in the other 

1 Assuming that these are the normal prices established by competition, 
it would appear that England had an absolute advantage over the United 
States in the production of the first four articles; and that, with the last 
four, the absolute advantage lay with the United States. 



238 



INTERNATIONAL TRADE 



sufficiently to change the currents of trade and establish 
an equilibrium between exports and imports. 

We may suppose, for instance, that the exportation of 
gold to England continues until prices advance twenty per 
Further mus- cent in that country and fall in corresponding 
tration. degree in the United States.. After this occurs, 

the prices of the eight commodities will stand as follows 
in the two countries: — 



Commodities 


English 
Prices 


American 
Prices 


Steel rails .... 

Wool 

Carpet 

Cotton cloth • 

Wheat 

Corn 

Leather 

Pork 


$l6.8o 
.18 

I.44 
.144 

1.08 
.84 
.24 
.18 


$16.00 
.16 
1.60 
.12 
.48 
40 
.12 
.056 



Obviously, at the new level of prices, no profit could be 
made on the goods which England formerly sold to the 
United States, with the exception of carpets; while the 
margin of profits on exports of American wheat, corn, 
leather, and pork would have increased to an enormous 
extent. In fact, there might now be a profit in exporting 
wool and cotton cloth to England, since the differences in 
prices would probably more than cover the cost of transpor- 
tation. The result would be that imports from England 
would fall to small proportions, while exports from the 
United States would be largely increased. 

In this case we have assumed a small number of com- 



THE NATURE OF INTERNATIONAL TRADE 239 

modities and a much greater change of prices than could 
hold true of actual traffic between the two countries, but 
the principle is valid with 10,000 articles of 

1 x ■ 1 1 Summary. 

commerce and with slight changes in the general 
level of prices. The permanent trade between England 
and the United States consists of the exchange of products 
in which each country has the greatest comparative ad- 
vantages ; exchange of other goods, in which the difference 
between domestic and foreign prices is narrowest, will be 
intermittent, falling to small proportions, or even disap- 
pearing, when slight changes in prices wipe out the margin 
of profits. This, then, is our second principle : in foreign 
trade comparative costs of production are the determining 
factor. 

§ 161. The United States, of course, has commercial 
relations with many countries besides England, and our 
statement of the laws of trade needs to take Trade with 
this fact into account. In 191 1 our exports mustb? 1 "* 
to the United Kingdom were valued at considered. 
$576,000,000, while imports from that country did not 
exceed $261,300,000; with Germany our exports stood 
at $287,500,000 and the imports at $163,200,000. With 
Cuba, however, our imports exceeded exports by over 
$49,000,000; in the South American trade, our excess 
of imports aggregated $73,000,000; and with Asiatic 
countries the net result was a balance of imports amount- 
ing to over $128,000,000. In this manner an excess of im- 
ports from one country may be offset by an excess of 
exports to another; and no serious outflow of gold will 
be occasioned provided that, upon the whole volume of 
transactions, exports and imports tend to an equilibrium. 



240 INTERNATIONAL TRADE 

Whenever the equilibrium is disturbed, shipments of money 
tend to change prices and to equalize exports and imports. 
It is necessary, however, to remember that many invisible 
elements enter into the determination of a country's posi- 
Aiso the in- tion m tne international exchanges. If on the 

visible ele- m G 

mentsintne invisible accounts a country is a debtor, the 

foreign ex- 

changes. movement of commodities must be such as to 
produce an excess of exports sufficient to pay the indebted- 
ness ; and if the country be a creditor, the excess of imports 
must be sufficient to enable foreigners to meet their obli- 
gations. Upon the whole volume of international trans- 
actions, visible and invisible, there will be a constant 
equalization of debit and credit items, which is brought 
about chiefly by changes in the export and import of com- 
modities. For this reason a favorable or unfavorable bal- 
ance of trade can indicate nothing more than the position 
which a country occupies, as debtor or creditor, on account 
of the invisible elements of the exchanges; it can show 
nothing more than that a balance of exports or of imports 
is required in order to establish an equilibrium of in- 
ternational transactions. 

III. The Restriction of International Trade 

§ 162. Foreign trade has always been restricted to a 
greater or less degree by customs duties levied upon goods 
customs exchanged between different countries. The 
duties - earlier method was generally to impose a light 

tax, of from one to five per cent, upon all imports and 
exports; but the modern practice is to levy heavier rates 
upon the former and to exempt the latter, since expor 
duties tend to destroy the trade unless the taxed commod 



RESTRICTION OF INTERNATIONAL TRADE 24 1 

ity enjoys a monopoly in the foreign market. Customs 
duties may be either specific or ad valorem according as 
the mere bulk or the value of the commodities is made 
the basis of assessment; thus the duty of forty cents per 
ton which the United States levies upon iron ore is specific, 
while the tax on diamonds is ten per cent, ad valorem. 

§ 163. Import duties are sometimes levied solely for 
the purpose of obtaining revenue for the government. 
When this is the case, the duties are not made Revenue 
so high as to restrict very greatly the amount of tanffs - 
goods imported, because such action would result in a loss 
of revenue. The English tariff at the present time aims 
to tax, as far as possible, only commodities that do not 
come into competition with the products of home indus- 
tries; and whenever a duty is levied upon an article that 
is produced at home, an excise tax of similar weight is 
imposed upon the domestic product. The result is that 
the tariff gives no advantage to the domestic producer 
and interferes as little as possible with business conditions. 
A revenue duty must normally raise the price of a com- 
modity by about the amount of the tax, since it is an added 
element in the cost of placing the product on the market. 
English merchants who imported tea paid to the govern- 
ment in 1900 the sum of $31,000,000, and there is no doubt 
that the largest part of this tax fell on the consumers. 

§ 164. When duties are laid upon imports without an 
equivalent excise tax upon similar domestic products, 
the effect is to give domestic producers an i nC i den tai 
advantage over foreign competitors. If the P rotectlon - 
rates are not raised above the point at which the largest 
revenue is received, a tariff may be described as a revenue 



242 INTERNATIONAL TRADE 

tariff that gives incidental protection ; this was, in general, 
the character of the tariffs established in the United States 
between 1789 and 181 2. 

But duties are often raised above the rates that yield 
the largest revenue, for the purpose of cutting down 
Protective imports and protecting domestic producers, 
tariffs. Every such duty is purely protective in char- 

acter, and the revenue that it may yield is merely an 
incidental factor; indeed, duties are sometimes made 
so high as to be practically prohibitory, and to reduce 
the receipts to insignificant proportions. In the United 
States the tariff was doubled at the outbreak of the War 
of 181 2 ; and in 181 6, when a new law was enacted, many 
duties were placed upon a distinctly protective basis. 
Since that date our various tariff laws have usually been 
drawn with a view to extending a high degree of protection 
to domestic industries. The tariff law of 1913, however, 
has materially lowered duties, and probably marks the 
end of the era of high protection. 

§ 165. The general effect of a protective duty is to 
increase the cost of importing a commodity and to encour- 
n , „ + age domestic labor and capital to undertake 

CrCIlCrcll CIT6C X 

of protective to produce it. In the United States protec- 

duties. . 

tion has been invoked chiefly for the benefit 
of manufacturing industries ; but in Europe, at the present 
time, the principal object of protection is to favor the 
landed interests in their competition with cheaper bread- 
stuffs and meats of newer countries. Concerning its ex- 
pediency, public opinion has always been divided; and 
the economic questions at issue have usually been com- 
plicated with political considerations. 



RESTRICTION OF INTERNATIONAL TRADE 243 

§ 166. Approaching the problem first from a purely 
economic point of view, and ignoring political considera- 
tions, we must observe that the first effect of „ 

1 Economic 

a protective duty is not to increase the amount effects of 

- , , , -it 1 ^ protection. 

of labor and capital that obtain employment, 
but to divert a part of a country's productive energy from 
the fields that it would otherwise have entered, and to 
place it in industries that are favored by the law. The 
only exception occurs when a high duty attracts foreign 
capital that would not have come into the country upon 
other conditions. In the United States a certain amount 
of European capital has been attracted in this manner, 1 
but most of the funds invested in American enterprises 
have gone into railroads and other industries that have 
not been affected by the tariff; in fact, foreign capital 
seems to seek the unprotected industries in preference 
to the protected. In general, therefore, a protective duty 
does not increase the extent of a country's industry, but 
merely changes its character. 

The principal objection to a protective duty is that a 
country's labor and capital, when left to themselves, find 
investment in those industries' which offer the Diversion of 
best advantages, so that protection diverts capital into 
productive energy from more to less profitable JjJStJJJ " in . 
employment. This is another hard saying du stries. 
which is not accepted by most friends of protection, but 

1 In 1892 it was claimed that some millions of foreign capital had been 
invested in the tin plate and other industries that had received increased 
protection in 1890. But even when the figures presented were accepted 
at their face value, they amounted to a very small per cent of the new 
capital that is annually invested in American manufactures, to say nothing 
of other industries. 



244 INTERNATIONAL TRADE 

its correctness is not difficult to establish. Our study 
of the nature of international trade shows us that foreign 
products can never come into a country except in exchange 
for some equivalent, because commerce is conducted for 
profit and not from motives of philanthropy. Moreover 
we have seen that imports cannot be bought solely by a 
continued exportation of money, since the outflow of gold 
lowers prices and destroys importers' profits. Imports 
must be paid for chiefly by exports of commodities, and 
prices at home and abroad will always tend to a level 
that will permit the latter to equal the former. Foreign 
competition, therefore, can never prevent the investment 
of a country's labor and capital in enough industries to 
furnish the commodities by which payment is made for 
imports. 

Moreover, in any case, the bulk of the work which a 
nation requires to supply its needs must be done at home 

and can, by no possibility, be performed in 
tries cannot another country. Domestic services must be 

rendered in the household, professional call- 
ings must be pursued in the country where the patrons 
live, buildings must be erfected where they are wanted, 
railroad and other transportation agencies require the 
services of local laborers, while mercantile pursuits call 
for an immense amount of labor that must be performed 
in the country. Then, such workmen as barbers, bakers, 
butchers, laundresses, hotel keepers, gardeners, hostlers, 
and the like, are engaged in occupations that cannot be 
affected by foreign competition. Only in the field of 
agriculture, mining, and manufactures is it possible, 
generally speaking, to utilize the products of foreign capital 



RESTRICTION OF INTERNATIONAL TRADE 245 

and labor instead of those of domestic make; and it is 
only these industries that can be affected by a tariff. Even 
here there is a great deal of work that foreigners cannot 
perform, such as that of the cobbler, the village black- 
smith, and the wheelwright; while bulky products such 
as bricks, or perishable goods like milk and garden truck, 
cannot be procured from foreign countries except in dis- 
tricts adjacent to a frontier. The statistics of occupations 
collected by the census disclose the fact that probably 
more than one half of the people engaged in gainful occu- 
pations in the United States are doing work which could 
not conceivably be protected by a duty on imports. More- 
over, of the remainder who are engaged in agriculture 
or manufactures, it appears that by far the largest pro- 
portion is found in occupations that produce enormous 
quantities of goods for export. In fact, when allowance 
is made for callings which cannot conceivably be affected 
by foreign competition, and for agricultural and manu- 
facturing industries in which American producers have 
a marked advantage over foreign, it becomes evident 
that not more than ten per cent of the labor and capital 
of the country is in a position to profit by protection. 

Now if perfect freedom exists, the labor and capital 
of any country will flow first of all into occupations in 
which, from the very nature of the case, no 
foreign competition can be felt; or will be of free ex- 
invested in those branches of agriculture and 
manufactures in which the prevailing level of prices makes 
it profitable to produce goods both for domestic use and 
for export. No competition by foreigners can ever alter 
this fact, which assures to domestic labor and capital 



246 INTERNATIONAL TRADE 

the amplest and most profitable employment; for the 
industries in which goods can be produced for export are 
precisely those for which the country possesses, at the time 
being, the greatest comparative advantage. Therefore 
the production of wealth will be greatest if the energy 
and enterprise of the people are devoted to these branches. 
If the labor of 200 men and capital to the amount of 
$200,000 will produce 500,000 bushels of wheat or 200,000 
yards of cloth in the United States, while in England 
they will produce 300,000 bushels of wheat or 200,000 
yards of cloth, the former country, while under no abso- 
lute disadvantage in the manufacture of cloth, will have 
a considerable comparative advantage in the production 
of wheat. If no trade is carried on between the countries, 
and each one divides its labor and capital equally between 
the two industries, England will produce 150,000 bushels 
of wheat and 100,000 yards of cloth; while in the United 
States the figures will be respectively 250,000 and 100,000. 
But if the United States invests all of its labor and capi- 
tal in raising wheat, and England devotes itself exclu- 
sively to the production of cloth, the total product of 
the two nations will be 500,000 bushels of the former 
commodity and 200,000 yards of the latter. Thus we 
see that the opening of an unrestricted trade, which would 
have to be based upon comparative advantages of pro- 
duction, would increase the aggregate production by 
100,000 bushels of wheat. 1 In this way, therefore, free- 

1 Sometimes it is objected that the so-called more productive industries 
cannot afford a sufficient field for all the labor and capital of the country. 
But it is evident that, when labor and capital begin to crowd into one 
industry in such quantities that it becomes less profitable, investment will 
naturally begin in the industry next in order of advantage. No tariff if 



RESTRICTION OF INTERNATIONAL TRADE 247 

dom of exchange must set the people of each country at 
work upon the industries in which their resources can 
be most advantageously employed. 

§ 167. So far as the present productivity of a nation's 
industry is concerned, there is no answer to the argument 
iust stated: but it may be argued that the 

' ' ... Present and 

causes that now make certain industries less future effect 
profitable than others may be removed with 
proper encouragement, and that it is not desirable to 
confine a people to a few industries like cloth making 
or the production of grain. It may be that a few years 
of experience will enable entrepreneurs to learn the best 
methods of production, and laborers to acquire a higher 
degree of skill, so that the industry will become as profita- 
ble as any other. In such a case the initial loss occasioned 
by the establishment of a less productive enterprise will 
come to an end; and the country will have the advantage 
of a greater diversity of its industries, which will give larger 
scope for the development of the various aptitudes of its 
people. That such a result may follow the establish- 
ment of a few wisely chosen industries by means of pro- 
tective duties is generally conceded by economists, and 
seems to be open to no doubt. It should be observed, 
however, that any industry thus developed is necessarily 
one for which the country offers superior advantages 
provided that the people learn how to utilize them. The 
effect of the protective duty, therefore, is merely to hasten 
the establishment of enterprises which would have come 
into existence at some time without such aid. 

needed to establish a new industry if an old one becomes so crowded as 
to be no longer more profitable than the other. 



248 INTERNATIONAL TRADE 

This is the " infant industry" argument upon which 
the earlier protectionists relied greatly in the United States. 
As formulated in the previous paragraph, it 
infant in- states what may follow the imposition of pro- 
tective duties upon the products of a few wisely 
chosen industries; but it does not describe the actual 
working of protection in all the cases in which it is applied 
in the United States and elsewhere. It is not possible 
to secure from Congress a tariff law which selects judi- 
ciously a few industries and accords them temporary 
protection during the time that capital and labor are over- 
coming the initial obstacles. Every section of country, 
in fact every congressional district, will demand protec- 
tion for its interests; and by the time that any measure 
emerges from the legislative mill, it is loaded down with 
a mass of objectionable details which have to be incor- 
porated in order to secure the votes necessary for its pas- 
sage. In this way protection has been accorded unwisely 
to industries that had no prospect of becoming self-sus- 
taining within a reasonable time, and a permanent waste 
of productive energy has been the result. Moreover, 
the new industries, when once established, have shown 
no disposition to give up the favors which were accorded 
in their infancy; but have fought to retain high duties 
on their products, even after they have grown into trusts 
and their competition has come to be dreaded in foreign 
markets. Temporary protection to a few wisely selected 
industries is a policy that bears not the remotest resem- 
blance to the course actually pursued by the United 
States. 

§ 168. It should never be forgotten that so long as a 



RESTRICTION OF INTERNATIONAL TRADE 249 

duty is needed to maintain an industry, protection is 
causing a diversion of capital from more to less produc- 
tive fields of investment. It must also enhance The burden of 
the price paid by consumers, although not P rotectlon - 
necessarily by the full amount of the duty. Protection, 
obviously, can be needed only by an industry in which 
the domestic cost of production is higher than the foreign ; 
and labor and capital would not embark in such an enter- 
prise if the duty did not raise the price sufficiently to cover 
this difference. In fact, the demand of the protectionist 
is usually for a duty "high enough to counterbalance 
the difference between the domestic and foreign cost," 
or to compensate for "the higher wages paid American 
labor." If the domestic cost is ten per cent higher than 
the foreign, a duty of fifty per cent will raise the price 
by not more than one tenth — provided that competition 
exists between domestic producers; very often, however, 
our manufacturers have combined to exact the last penny 
permitted by the law. Only when the domestic cost of 
production falls to the level of the foreign can the tax 
upon consumers come to an end. At that time, the duty 
is no longer needed to sustain the industry, and it should 
be promptly repealed in order to remove a powerful incen- 
tive for the formation of a monopoly. If this point is 
ever reached, the infant industry becomes able to stand 
upon its own feet, and the labor and capital invested in 
it can no longer be considered unprofitably employed; 
but up to this time, every industry that requires protection 
is supported at the expense of the community, and receives 
alms in the form of an addition to the price that consumers 
must pay. 



250 INTERNATIONAL TRADE 

§ 169. About 1840, in discussions of the tariff question, 
protectionists began to appeal for the support of work- 
The tariff ingmen by arguing that import duties are 
and wages. ne cessary in order to exclude the products of 
cheap European labor and to maintain a high rate of 
wages in the United States; and this contention has ever 
since played an important part in the debate. There is 
no doubt that American wages are generally higher than 
those which prevail in Europe, and this fact is now attri- 
buted to the influence of our protective tariff. In consider- 
ing the validity of this claim, it is important to remember 
that our higher rate of wages has always existed in the 
United States from the establishment of the first English 
colonies, and that, prior to 1789, ttiere was no national 
tariff to which this superiority could be attributed. 

In 1723, for instance, an English official in the province 
of New York wrote: "North America containing a vast 
Historical tract of land, every one is able to procure a 
data. piece of land at an inconsiderable rate, and 

therefore is fond to set up for himself rather than work 
for hire. This makes labor continue very dear, a common 
laborer usually earning three shillings by the day; and 
consequently any undertaking which requires many hands 
must be undertaken at a far greater expense than in Europe, 
and too often this charge only overbalances all the advan- 
tages which the country naturally affords, and is hardest 
to overcome to make any commodity of manufacture 
profitable which can be raised in Europe." And, during 
the early tariff controversies, the protectionists never 
thought of maintaining that protective duties caused 
high rates of wages ; rather they argued that since wages 



RESTRICTION OF INTERNATIONAL TRADE 25 1 

were higher in the United States, a tariff was needed 
in order to enable manufacturers to establish new enter- 
prises and pay the prevailing rates. It could not be argued 
that the tariff was responsible for the high general rate 
of American wages until the men who remembered that 
the higher wages were older than the tariff had disappeared 
from the scene of action. 

Wages depend, as we shall learn in the next chapter, 
upon the productivity of labor; and that this must be 
the case will be evident when one asks himself 

. Conclusion. 

how, except on condition that their labor pro- 
duced more commodities, the laborers of one country 
could possibly receive more than the laborers of another. 
Such a high rate of wages was no obstacle to the estab- 
lishment of the industries in which this country had the 
greatest comparative advantages, since in such cases the 
higher rate of payment was offset by greater efficiency. 
It was an obstacle, however, to the growth of industries 
in which the advantages of the country were not so great ; 
and it was on this ground that protection was deemed 
necessary. The tariff merely enabled the employers who 
entered the less productive industries to pay the prevail- 
ing rates of wages, and it did this by imposing a tax upon 
the consumers. Undoubtedly, after labor has been 
diverted into a less productive industry, the continued 
employment of the persons so engaged, at the existing 
rate of wages, is dependent upon the duty; and it can 
become independent only when the enterprise has come to 
be self-supporting and able to produce as cheaply as for- 
eign competitors. The tariff, then, did not create and does 
not maintain the general high rate of American wages; 



252 INTERNATIONAL TRADE 

but it merely enables a small number of laborers to find 
employment, at prevailing rates, in industries that are 
supported by taxing the rest of the community. When 
one considers that less than ten per cent of the labor force 
of the country is employed in callings that are in any way 
dependent upon the tariff, it becomes evident that it is 
absurd to suppose that any benefits accruing to such a 
small body of workers could possibly raise the wages of the 
remaining ninety per cent to a point twenty or thirty or 
fifty per cent above the level that prevails in the various 
parts of Europe. 1 

§ 170. In most discussions concerning the effect of the 
American tariff, the protectionist assumes that manu- 
factures could not have been established in 

Diversifica- 
tion of in- the United States without its aid; and he 

argues that, whatever it may have cost, pro- 
tection has had the effect of diversifying our industries. 
This is to claim more than historical facts warrant. In 
the eighteenth century, in spite of unrestrained English 
competition and in the face of Parliamentary prohibitions, 
our people established several important branches of 
manufactures. In 1791, when Alexander Hamilton made 
his famous argument in favor of protection, he could say, 
at a time when national tariff laws had not existed long 
enough to exert an appreciable influence: "To all the 
arguments which are brought to evince the impracticability 
of success in manufacturing establishments in the United 
States, it might have been a sufficient answer to have 

1 That a tariff is not needed to keep wages in one country above those 
prevailing in neighboring lands can be seen from the fact that in England, 
under free trade, wages are higher than in the rest of Europe. 



RESTRICTION OF INTERNATIONAL TRADE 253 

referred to the experience of what has been already done. 
It is certain that several important branches have grown 
up and flourished with a rapidity which surprises, affording 
an encouraging assurance of success in further attempts." 
§ 171. At the present day the important question is 
not the influence which the tariff has exerted in the 
past, but the policy which the country should The present 
pursue in the future. In 1909 Congress revised situation - 
the tariff, but failed to make such a general reduction 
of duties as the country demanded; with the result 
that agitation for further reduction continued, and led 
to the enactment of the tariff law of 1913. This demand 
for lower duties was caused in part by the feeling that 
many of the duties were excessive, and that some of them 
resulted in gross favoritism to particular industries and 
afforded shelter to oppressive monopolies. Then, too, 
between 1891 and 1911, exports of the products of do- 
mestic manufactures had increased from $188,300,000 to 
$907,500,000; and it had become evident that our manu- 
facturers were turning their attention to foreign markets 
to a greater extent than ever before. Such manufacturers 
were learning that import duties on raw materials ob- 
structed the development of foreign trade, and they had at 
the same time developed their industries to such a point 
that they needed to extend the foreign markets for their 
products. For these reasons the law of 191 3 encountered 
less opposition than such a measure would have met 
a decade earlier. If the inevitable readjustments caused 
by the new tariff do not seriously disturb industry and 
that law can have a fair trial for eight or ten years, it 
will probably stimulate greatly the development of those 



254 INTERNATIONAL TRADE 

industries in which the United States has the greatest 
comparative advantages and lead to marked increase 
of our foreign trade. 

FOR SUPPLEMENTARY STUDY 

General: Bullock, Selected Readings in Economics, 453-512; 
Hadley, Economics, 421-445; Nicholson, Political Econ- 
omy, II, 235-328; Seager, Introduction to Economics, 361- 
384; Taussig, Principles of Economics, Bk. IV. 

Special : Bastable, The Commerce of Nations ; Roberts, Govern- 
ment Revenue; Shaw, The National Revenues ; Sumner, Pro- 
tectionism ; Taussig, Tariff History of the United States. 



CHAPTER XII 

THE DISTRIBUTION OF WEALTH 
I. The National Income and its Distribution 

§ 172. The annual product of a nation's industry is 
obtained through the cooperation of various classes of 
persons, — employers, laborers, landowners, and The distribu- 
capitalists, — each of which claims a share of tlve P rocess - 
the national income. Production, therefore, must be 
followed by a process of distribution, in which the 
wealth created each year shall find its way into the 
hands of the different recipients. The nature and re- 
sults of this distributive process now demand careful 
study; and, in considering them, we shall have to deal 
with some of the most important and difficult problems 
of the science. 

At the outset it should be observed that the annual 
product of industry does not constitute the whole of 
a nation's income. Every society possesses 

1 Annual prod- 

a larger or smaller quantity of durable con- uctandan- 
sumer's goods, such as dwelling houses, books, 
or pictures, accumulated in the past, from which it derives 
each year a considerable number of enjoyments. All the 
services that are derived from such possessions constitute 
a part of the social income. They accrue, obviously, 
to the owners of the goods; and the manner in which 
they are distributed requires little further consideration. 

255 



256 THE DISTRIBUTION OF WEALTH 

It may be said, however, that laws regulating inheritance 
exert, from one generation to another, an important 
influence upon the distribution of this form of social 
income. 

It is of the division of the current product of the nation's 

industry that the economist usually treats when he studies 

the distribution of wealth. This consists of 

Productivity 

limited by both material goods and personal services 
obtained from the employment of labor and 
capital; and it will be meager or copious according to 
the energy and intelligence with which production is 
conducted, and the natural resources to which the people 
have access. To a very considerable extent, also, the 
productivity of current industry depends upon the amount 
of capital that producers have at their command. Greater 
skill, a larger number of laborers, and increased zeal will 
enable a society at any time to increase the products at its 
disposal; but there are limits to such improvement of 
the productivity of industry, arising from the fact that 
modern methods are conditioned upon the employment 
of capital. With the steam engine, the blast furnace, 
and the Bessemer converter, the United States can pro- 
duce more than 15,000,000 tons of steel in a single year; 
but without the aid of capital there could be no production 
of this, or any other metal; and, in order to double the 
product, a large additional investment of capital would 
be required. The same thing is true, although not always 
to the same extent, in the production of most material 
commodities. It is therefore evident that the efficiency 
of modern industry is conditioned, to a very large degree, 
upon the amount of capital produced in past years and 



NATIONAL INCOME AND ITS DISTRIBUTION 257 

available for current use. In this manner the present 
is limited by the past, and the amount of the social income 
is dependent upon past accumulations of capital. 

The income of a society is here conceived of as a certain 
amount of commodities or services; but the incomes 
which individuals draw from the annual prod- Value and 
uct of industry must be considered both as dlstnbutlon - 
definite quantities of economic goods and as definite 
quantities of value. For in the modern distributive 
process, the fundamental fact is that goods are produced 
for the market, and that it is the value of the product, 
not the product itself, that is divided among the various 
persons entitled to participate in the proceeds of an enter- 
prise. When a farm is cultivated upon shares, landowner 
and tenant may divide a certain number of bales of cotton 
or bushels of wheat; but usually commodities are first 
sent to market, and the money secured from the sale is 
the source from which individual shares are derived. 
Private incomes, therefore, are generally expressed in 
terms of money. 

This leads to a distinction which frequently is of great 
importance. Private incomes may be money incomes, 
i.e., definite sums of money; or they may be 
real incomes, which, of course, consist of the money in- 

,. . i«i • comes. 

commodities and services that money incomes 
will command. In a single community, where the prices 
of articles of necessary consumption are the same for all 
persons considered, the amount of a man's money income 
is a satisfactory indication of the comfort in which he 
lives. But between different communities and countries 
prices of particular articles, and especially of such a thing 



258 THE DISTRIBUTION OF WEALTH 

as house rent, differ so widely that mere money incomes 
afford no satisfactory basis for a comparison of the real 
incomes that people enjoy. This consideration is exceed- 
ingly important in dealing with statistics showing the 
remuneration of labor; for between one country and 
another, differences in nominal, or money, wages may or 
may not indicate corresponding differences in the real 
wages received. 

§ 173. Whenever the cooperation of the factors of pro- 
duction is secured in the simplest manner possible, i.e., in 
cases where all factors are owned by a single 

Simplest m J & 

form of man, private incomes depend solely upon the 

distribution. . . . . , .„ . 

prices obtained for the commodities that the 
producer has to offer. A farmer, for instance, owning 
his land and capital, and employing no labor except his 
own, receives his share of the social income when he dis- 
poses of his produce in the market. And for a shoemaker, 
a tailor, or a storekeeper, similarly situated, the distribu- 
tion of wealth means nothing more than the establish- 
ment of the value of the goods or services that he sells to 
his customers. If all production were organized in the 
simple manner just described, the laws of value would 
be also the only principles governing the division of the 
social income among the various producers. 

But production, as we have seen, is usually organized 
in a far more complex fashion, so that the distribution 
^. . . .. of wealth involves something more than the 

Distribution ° 

usually com- simple process of exchange. Employers, 

landowners, capitalists, and laborers cooperate 

in the establishment of all large enterprises, each class 

performing a separate function; and, after the value of 



NATIONAL INCOME AND ITS DISTRIBUTION 259 

the product has been determined, it is necessary that a 
satisfactory division of the proceeds should be secured. 
Thus the money received from the sale of products is 
divided up into the landowner's rent, the capitalist's inter- 
est, the laborer's wages, and the employer's profits ; and 
four different kinds of income emerge as the result of the 
distributive process. 

§ 174. It is worth while to examine a little further the 
mechanism by which distribution is accomplished, and 
the relations that exist between the various The em- 
classes of participants. The employer, or fn^tribu* 06 
responsible manager of a business enterprise, tion - 
is the central figure in the distributive process. He may, 
.and usually does, own some part of the capital invested 
in the enterprise, but very often borrows a part. The 
land occupied may belong to him, or may be rented. He 
may perform clerical work or act as superintendent ; but 
most of the labor, especially that calling for a lower grade 
of skill, will have to be intrusted to hired workers. With 
landowner, capitalist, and laborer, the employer must 
arrange contracts which call for the payment of specified 
sums for rent, interest, and wages; and the obligations 
thus assumed must be met, whether the enterprise proves 
profitable or not. If a surplus remains after rent, interest, 
and wages have been paid, it belongs to the employer as 
the gross profits of the business; but everything received 
in this manner is a contingent income that is dependent 
upon his ability to market the product at remunerative 
prices. The employer's capital and the entire proceeds 
of the year's sales stand as a buffer between the other 
classes of participants and the chance of loss, so that upon 



260 THE DISTRIBUTION OF WEALTH 

him the risks of the business primarily fall. Landowners, 
capitalists, and laborers can lose only when the enterprise 
proves such a complete failure that the employer's invest- 
ment is wiped entirely out. The laborers, in fact, through 
mechanics' liens and other preferences accorded by the 
law, are placed in the position of favored creditors and 
can seldom lose their wages, even though the assets of a 
bankrupt concern come far short of meeting the liabilities. 
§ 175. We are now ready to examine the forces that 
control the bargaining between employers and the land- 
owners, capitalists, or laborers, with whom 

Our problem. 7 r ' ' 

they establish business relations. It will be 
our purpose to learn what laws govern the amount that 
must be paid for rent, interest, and wages, and to ascertain: 
under what circumstances a # net profit can accrue to a 
business venture. If these things can be explained, we 
shall understand the manner in which the proceeds of 
industry are divided. It will appear that distribution is 
really a process of valuation, and that the share received 
by the landowner, capitalist, laborer, or employer, depends 
upon the value of the contribution which his property or 
labor has made to the product of industry. 

At the outset it will be assumed that free competition 
exists ; so that the value of each commodity tends toward 
competition i ts normal level, and the division of the product 
assumed. proceeds upon a competitive basis. Through- 
out the chapter we shall find ourselves constantly returning 
to the great forces of supply and demand, upon which all 
values depend ; in fact, all the laws of distribution are but 
particular applications of the general principles with which 
<ve became familiar in our study of the theory of value. 



INTEREST 26l 

II. Interest 

§ 176. A part of the proceeds of industry must, obvi- 
ously, go to replace the capital consumed in production. 
Then, in addition to the return or replacement Nature of 
of the funds invested, owners of capital receive mterest - 
an annual income known as interest, which takes the form 
of a stipulated percentage of the principal. This return 
must be received not only by the lenders who invest their 
funds with managers of productive enterprises, but also 
by any manager who supplies a part or the whole of the 
capital which he employs. 1 Payment for an actual loan, 
therefore, is but one form which interest assumes ; capital 
invested by the employer himself must, no less than that 
of the " money lenders," yield an annual income to the 
owner. » 

Since money is the medium by which most transfers of 
capital are made, and the standard by which its value is 
measured, an investment of capital is often 

1 Interest not 

called an investment of money, and interest a payment 

. i.ii ri for money. 

is frequently said to be a payment for the use 
of money. Such a choice of terms does no harm if one 
is careful to remember that in most cases it is other things 
than money that are actually invested ; and that interest is 
paid for productive capital, whatever its form may be. 
The money which is said to be invested in a factory is in 
reality expended in erecting buildings and purchasing 
equipment; and the investment really consists of these 
instruments of production, and not of the money by which 

1 The income which the employer receives in this way comes to him, 
not by virtue of his position as entrepreneur, but by reason of his exercis- 
ing the additional function of capitalist. 



262 THE DISTRIBUTION OF WEALTH 

they were transferred from producers to factory owners. 
Although this may seem to be a simple matter, confusion 
has often arisen at this point. It has been proposed to 
make capital cheap, i.e., to lower the rate of interest, by 
increasing the quantity of money in circulation; whereas 
the circulating medium might be increased indefinitely 
without making instruments of production any more 
abundant, or lowering the rate of interest that one must 
pay for their use. Money is a medium for transferring 
capital, just as a freight car is a medium for transferring 
wheat; and the way to make capital abundant is, like 
the way to make wheat abundant, to increase the quantity 
of the thing transferred rather than to multiply unneces- 
sarily the apparatus employed in effecting the transfer. 
Not an inordinate number of freight cars, but more wheat ; 
not an endless supply of money, but more buildings, 
tools, and machines will be needed, in the one case as in 
the other, to make the supply abundant and to reduce 
the value. 

§ 177. The rate of interest that capital can command 
will depend, like the income derived from anything else, 
Rate of inter- upon the conditions of demand and supply. 
onVemand 5 Turning now to the former, we find that 
and supply, capital is demanded by business men who 
are constantly seeking to extend existing enterprises 
or to establish new ones. In a country where the natural 
resources are large and but little exploited, the products 
obtainable from a given investment of capital will be large, 
and the demand is likely to be strong ; whereas, in an older 
country that is more fully developed, a smaller product 
can be obtained, and the demand will be less intense. 



INTEREST 263 

So, too, when business is active and profits unusually 
large, entrepreneurs will desire to obtain a larger quantity 
of capital and can afford to pay a better rate; while a 
period of industrial depression produces the opposite 
effect. In all cases the demand will increase if the rate 
of interest is low ; since it is easier, when capital is cheap, 
to find enterprises in which its productivity is great enough 
to warrant its employment; whereas, when the rate rises, 
employers find it impossible to use capital in so many 
undertakings, and the demand will decline. In every 
industry, in fact, there is a considerable margin within 
which capital can supplant labor, if it can be obtained 
on easy terms ; and where labor will be used in preference 
to machinery if the rate of interest is high (§ 45). When 
all circumstances are taken into account, it is evident 
that the demand will vary directly as the productivity of 
capital, 1 and inversely as the rate at which it is offered. 

§ 178. It is frequently said that interest is obtained 
because capital is productive; and this is considered a 
sufficient explanation both of the fact that The supply 
interest is paid, and of the rate of payment that of ca P ltaL 
is exacted. But if capital could be procured without sac- 
rifice upon the part of any one, and in quantity sufficient 
to meet the needs of industry, nothing could be obtained 

1 Or, strictly, as the marginal productivity of capital. All parts of the 
supply are not equally productive. Capital used in enterprises for which 
the natural resources are greatest or the demand most urgent yields more 
than in many later enterprises, which it is only just worth while to estab- 
lish. As a country's supply of capital increases, and the best opportunities 
are taken, the marginal productivity declines. Everywhere it is the pro- 
ductivity of the least productive unit of the supply, i.e., the marginal product, 
that determines the importance of any single unit of capital. 



264 THE DISTRIBUTION OF WEALTH 

for its use; and interest would disappear as a share in 
distribution. Indeed, people who were anxious to pro- 
vide for their future would even offer to pay some 
trustworthy person who would furnish a safe place 
for storing their savings. Interest is paid not merely 
because capital is productive, but because it costs some- 
thing to obtain enough of it to satisfy the demands of 
business. This leads us to examine the conditions that 
govern the supply. 

As has been explained elsewhere, the formation of capi- 
tal requires abstinence, or the sacrifice of the present to 
the future. The person who lends the sum of 

Abstinence. ... 

$1000, or invests a similar amount of capital 
in an enterprise of his own, sacrifices a present income for 
one available only at some future date, — we will suppose, 
the end of a year. Ordinarily no one would care to do 
this unless some inducement was offered him as a com- 
pensation for his waiting. This is partly because the 
future is often uncertain, and a future payment of $1000 
is not so assured a thing as $1000 now in hand. But it 
is due also to the fact that, even where it is as certain as 
death or taxes, a future pleasure or pain is undervalued as 
compared with a present one. For these reasons a person 
who would obtain a loan must offer to return at the expi- 
ration of the stipulated period something more than the 
principal which he borrows, and people who consume 
commodities produced with the aid of a certain amount 
of capital must pay prices that will allow the employer 
to recover something more than has been expended for 
materials and appliances. Future goods are worth less 
than present, and when one is exchanged for the other, a 



INTEREST 265 

premium or bonus must be paid to the person who sac- 
rifices the present for the future. Not $1000 of future 
income, but $1050 or $1060 will be needed to obtain the 
use of $1000 of ready cash for the period of a year. The 
premium required to make the future income equal to 
the present is interest. 

But all capital does not represent equal amounts of sac- 
rifice; it is supplied by different classes of persons, and 
with different degrees of difficulty. It may capital repre- 
come from people enjoying large incomes who ^amounts 
can readily save a considerable proportion of ofabstinenc e- 
what they gain ; it may be furnished by persons of moderate 
means who desire to provide for the future, and would do so 
even if the rate of interest should fall to a very low figure ; 
and, in the third place, it is supplied by a large number 
of marginal investors who will furnish more or less capital 
according to the inducement that is offered. These mar- 
ginal investors may be wealthy people, or persons of mod- 
erate means, whom a high rate of interest will induce to 
increase their savings, or they may be people of a less 
provident disposition who would save nothing without a 
fairly strong and obvious stimulus to thrift. 

In this way it comes about that, although a certain 
amount of capital might be had for little or nothing, the 
large supply already invested in business, and „ , 

o rr j j > Supply varies 

the still larger supply that will be wanted to- with rate of 

, . . r . . interest. 

morrow, cannot be secured except by offering 
a fair rate of interest. Moreover, it appears that the 
higher the rate, the larger will be the aggregate amount 
of capital offered ; so that the supply will vary directly as 
the rate of interest. 



266 THE DISTRIBUTION OF WEALTH 

A number of writers in recent years have been inclined 
to doubt whether any such relation exists between the 
controversy amount of capital saved and the rate offered 
at this point. f or j ts use> They have perceived that a con- 
siderable number of persons would, in any event, endeavor 
to provide for the future, and they argue that the lower the 
remuneration received, the more must a man save in order 
to provide a comfortable income upon which he may 
retire. They believe that the habit of saving is now so 
firmly established that the process would continue on 
about the same scale as at present no matter what the rate 
of interest might be. This is a comfortable belief for one 
who advocates policies that are destructive of thrift and 
prudence ; but it overlooks the fact that, while some capi- 
tal undoubtedly would be accumulated without the induce- 
ment of a good rate of interest, a considerable part of our 
present supply comes from persons who will save more or 
save less according to the rate obtainable from invest- 
ments. It also fails to give sufficient weight to the fact 
that constant saving is needed, not only to make additions 
to the supply of capital, but also to keep up the present 
stock. For capital is maintained intact only by constant 
replacement ; and the inducement to replace the buildings, 
materials, and appliances consumed in productive indus- 
try, is in no way different from that required for saving 
additional capital. In order to maintain the present 
stock as well as to provide for the growing needs of indus- 
try, the savings of the class of marginal investors are 
required; and so long as this is the case our aggregate 
supply of capital will vary with the inducements offered 
to capitalists. 



INTEREST 267 

§ 1 79. The rate of interest, like the price of a commodity, 
must be such as will equalize the supply and the demand. 
A given stock of capital cannot command a 

" . Equalization 

higher rate than is offered by the marginal of demand 
producer, who employs such capital as he ob- 
tains under conditions of the least productivity. But 
though this rate may have to be accepted for a short time, 
it cannot prevail for any considerable period, unless it is 
adequate compensation for the sacrifices incurred by the 
marginal investor, to whom a considerable premium must 
be offered in order to induce him to exchange present 
goods for future, On the other hand, if a given stock 
commands a rate that is greater than the marginal sacri- 
fice required to obtain it, the supply will gradually increase 
until its diminishing marginal productivity lowers the 
price to a point that no more than satisfies the marginal 
investor. Thus the normal rate of interest is such as will 
cause an equilibrium of supply and demand, and depends, 
like the normal value of a commodity, upon the demand of 
the marginal consumer and the sacrifices of the marginal 
producer. 

§ 180. So far we have considered nothing but the re- 
turn received for productive capital, but we must now 
examine briefly two other forms that interest other classes 
may assume. Owners of certain durable ofloans - 
consumer's goods, such as dwelling houses, may lease 
their property to tenants and obtain a stipulated annual 
income from the investment. In such transactions present 
goods are exchanged for future, just as truly as' in a loan of 
productive capital; and the annual income secured from 
property of this character will be determined in precisely 



268 THE DISTRIBUTION OF WEALTH 

the same manner as the rate paid for capital used in pro- 
duction. Loans are sometimes made for personal expen- 
diture and not for the support of productive undertakings. 
These are all too numerous, but are generally for small 
amounts, so that their aggregate mass is comparatively 
unimportant when contrasted with the enormous amounts 
of capital employed in industry. So far as they are sub- 
ject to the law of competition, the rate of interest upon 
such loans is determined in the manner described in the 
last paragraph ; but in many cases the ignorance or neces- 
sities of the borrower enable the lender to exact extortion- 
ate terms. 

§ 181. With all investments of capital, risk exercises 

an influence upon rates of interest. Manifestly, when 

there is a prospect of a loss of both principal 

Risk. 

and interest, a very large premium will be re- 
quired to equalize future goods with present ; and, in pro- 
portion as this factor can be reduced or eliminated, the 
amount of the premium will tend to decline. Risk, indeed, 
is not to be considered a factor that is independent of the 
principles already discussed, but it is one of the circum- 
stances that affect the supply of capital offered at any 
given rate of interest. It is important enough, however, 
to require express emphasis; and an unusually high rate 
of interest regularly points to an unusual risk. 

§ 182. It is a familiar fact of experience that in a progres- 
sive country the rate of interest tends gradually to decline. 
m This is due in part to the increase of wealth, 

Tendency of m r 7 

interest to which enlarges the supply of capital and reduces 

decline. . . ° . . . _ r 

its marginal productivity. In a newer coun- 
try, like the United States, where natural resources are 



INTEREST 269 

not so fully exploited, many opportunities exist for the 
remunerative investment of capital which cannot be 
equaled in an older country like England or France. 
Then, too, as a country becomes more fully developed, 
industries can be established upon a basis approved by 
experience, and there is less necessity for taking unknown 
risks. This makes business less speculative, and tends to 
reduce the rate of interest. In the United States the rate 
paid for capital is always high in a newly developed sec- 
tion, running as high as from twelve to fifteen per cent. 
The growth of wealth and the inflow of foreign capital 
gradually reduce interest to six or eight per cent; and 
there it is likely to remain until the district becomes largely 
independent of outside capital, which can command five 
per cent at home and will not be invested elsewhere unless 
higher rates are offered. In the leading countries of 
Europe, the rate is materially lower than in the United 
States ; and it is for this reason that so much foreign cap- 
ital has sought investment on this side of the Atlantic. 

§ 183. Although the two things are not different in their 
essential character, something should be said concerning 
what are known as short- and long-time loans. ^ 

Short- and 

The former are such loans as bankers make upon long-time 
call, or for brief periods ranging usually from 
one to three months; the latter may be represented, for 
present purposes, by such an investment as a five- or ten- 
year loan upon real estate, secured by a mortgage. Bank- 
ers' loans are sought by business men who constantly 
incur liabilities that must be met before returns can be 
secured from their investments. They represent, in a 
peculiar sense, a demand for money or credit needed upon 



270 THE DISTRIBUTION OF WEALTH 

short notice to maintain the solvency of the borrower ; so 
the rate that they command will fluctuate according to 
the conditions of what is called the money market. At 
certain times when the cash reserves of the New York 
banks are very large, money may be obtained upon call 
for as little as one per cent; but, upon a day's notice, 
some unfortunate turn of affairs might easily raise the 
price of call money to ten, twenty, or thirty per cent. On 
October 29, 1896, the rate was ten per cent when business 
opened in the morning; by noon it had jumped to fifty 
per cent annual interest, and before night it stood at eighty 
or one hundred per cent. On the other hand, the demand 
for mortgage loans is in no way influenced by the vicissi- 
tudes of the money market; and the interest rate may, 
for a generation or more, remain fixed at five or six per 
cent. Even with short-time loans, it is only the daily 
fluctuations that depend upon the plenty or scarcity of 
ready money ; for, if yearly averages are studied, it appears 
that the rate commanded by prime commercial paper, like 
the rate upon mortgage investments, gradually declines as a 
country's wealth and capital increase. In 1830 the Second 
Bank of the United States could obtain in Philadel- 
phia and New York seven per cent interest upon its ordi- 
nary discounts, for which, to-day, a rate of five per cent 
would be highly satisfactory to a banker. The decline 
has been brought about by the same causes that have 
reduced interest upon mortgages from six or seven to four 
or five per cent in the same communities. This fact 
shows us that short-time and long-time loans are governed 
by the same underlying conditions, and that they are, at 
bottom, transactions of precisely similar character. 



WAGES 271 



III. Wages 



§ 184. Wages are the portion of the product of industry 
received by the persons who perform labor, skilled or 
unskilled, mental or physical. In some of the Wages 
higher occupations the remuneration of the deflned - 
worker is called a salary, but it does not differ in its eco- 
nomic characteristics from the wages of the common 
laborer. Persons who are without the means necessary 
for establishing independent enterprises must sell their 
services to employers and become hired wage-earners ; but 
wages may be received also by small independent pro- 
ducers who perform their own labor, and by an employer, 
large or small, who does any of the routine work of his 
establishment in order to avoid hiring an additional man. 

§ 185. Hired laborers may receive either time or piece 
wages; the former being paid for each hour or day that 
labor is performed, the latter being adjusted T imeand 
to the amount of work done. With a time P iecewa e es - 
wage may go a tacit or express understanding that a cer- 
tain quantity of work shall be accomplished, and piece 
wages may be computed upon a basis that will enable the 
average worker to earn about so much per day or week, 
so that the difference between the two methods is not always 
so great as might appear at first sight. Yet, in general, 
the piece system gives the workman a somewhat greater 
stimulus to turn out a large product. It happens, very 
often, that both methods of remuneration coexist in the 
same industry ; and, in such cases, it will usually be found 
that the labor cost of each unit of product is about the 
same. Indeed, competition between employers can pro- 



272 THE DISTRIBUTION OF WEALTH 

duce no other result, because an establishment that pro- 
duces at a considerably higher labor cost than rules in 
the rest of the trade is likely to be forced out of the 
field. 

This leads to the further consideration that labor cost 
is a very different thing from rates of time wages. A high 
daily or weekly wage indicates generally 1 a high 
standard of efficiency, which makes the labor 
cost no higher than it is in other districts or countries where 
lower rates are paid. In point of fact the total cost of 
production is likely to be lower where high-grade labor 
is employed; for the increased wages are made good by 
the greater efficiency, while the product of a given plant 
is increased with a corresponding reduction of the fixed 
charges that enter into each unit of the output. In com- 
paring daily or weekly wages paid in the United States 
with those which prevail in other lands, this consideration 
is of the very greatest importance. 

§ 1 86. The rate of wages represents the value which 

labor possesses under the existing conditions of supply and 

f demand, and is determined in the same general 

wages de- wa y as the value of anything else. There are, 

pends on .... .. . . 

supply and even withm the same district, almost as many 
grades of labor as there are kinds of com- 
modities ; so that the laboring class is divided into vari- 
ous groups, each possessing a particular kind or degree 
of ability and receiving a different remuneration for its 
services. We must now investigate the forces that govern 

1 If no tariff exists to draw labor into some industries where it is less 
productive than in the others, a high rate of wages always points to high 
efficiency. 



WAGES 273 

the demand for labor and the supply of this agent of 
production. 

§ 187. The demand for any particular grade of labor 
will depend on the value of what it can produce. An inde- 
pendent farmer or artisan who sells the product Dem and for 
of his own hands can, obviously, receive for his labor - 
labor no more than the value of his goods ; and the same 
thing is true of the hired workman, under the operation 
of a healthy competition, although the complexity of the 
distributive process makes this fact less easy to perceive. 
An employer can afford to pay no more than a workman 
adds to the productivity of the farm or factory, and, there- 
fore, the demand for any grade of labor must depend upon 
what its productivity is considered to be. A skillful super- 
intendent who can secure the maximum output from each 
man or machine in a factory is the most productive person 
in the employ of the establishment, and his services will 
be in demand at a high salary; while the workman of 
inferior intelligence or industry, unskilled in any trade, 
produces little and is wanted, if at all, only at the lowest 
wages. These, of course, are the two extremes; and 
between them there may be, in any locality, 100 or 1000 
different classes of laborers representing as many grades 
of productivity and subject to corresponding differences 
in demand. 

Bearing in mind that different grades of labor will be de- 
manded only at wages that correspond to their varying degrees 
of productivity, we must next study a little more 

r JJ J Demand for 

closely the conditions that control the demand various grades 

for any single grade of workmen. It is a fact 

of experience that a few laborers of the same class, all of 



274 THE DISTRIBUTION OF WEALTH 

whom may compete for the same kind of employment, 
will find that their services are in demand at a higher price 
than could be obtained if their numbers should suddenly 
be increased. This is because, in any market, the produc- 
tivity of any kind of labor gradually diminishes as the 
supply is enlarged. A few workmen, even though un- 
skilled, when employed at a few places where the natural 
resources are the greatest, will create a larger product than 
additional laborers of the same class who have to be used 
in industries for which the conditions are less favorable. 
Then, too, on each farm or in each factory only a certain 
number of men are needed in order to secure the maximum 
efficiency ; and beyond that point, additional hands will 
not yield a proportionate increase of the output — a con- 
dition due to the variation of productive forces (§§43-45). 
It follows, necessarily, that the wages offered the mar- 
ginal workman must decline as the supply of workmen 
increases. 

It is evident, moreover, that the demand for the services 
of each class of workmen, depending, as it does, upon the 
Demand value of the product, must vary according to 

verseiyas tne P r i ce tna ^ is asked. A few men of a certain 
price. grade of skill might find a few employers, enjoy- 

ing the greatest natural advantages, who could afford to 
pay the very highest wages. A larger body of workmen 
must turn to other occupations, or must add to the number 
employed in the most favored industries; and in either 
case the productivity of the marginal laborer will decline. 
The result will be that the larger supply of labor can be 
taken off the market only at a lower rate, by employers 
whose situation does not permit them to offer as much as 



WAGES 275 

had previously been paid. Each increase of numbers, in 
fact, reducing the marginal product, 1 will reduce the rate 
still further so that the conditions of the labor market 
resemble those which rule in other markets. A high price 
attracts but few employers, while low rates steadily in- 
crease the demand until it becomes large enough to ab- 
sorb the supply. With labor, as with other things, the 
demand will vary inversely as the price. 

§ 188. Turning now to the conditions that govern the 
supply, we must observe that labor, like capital, has a 
cost of production, and that an adequate The supply 
supply cannot be had unless the remunera- oflabor - 
tion of the workman is sufficient to cover the cost of his 
services. For any given class the cost of production 
means the standard of living that the laborers are deter- 
mined to maintain; i.e., the quantity of the necessaries, 
comforts, or even luxuries that must be offered in order to 
obtain an adequate number of workmen at a given time, 
and to induce them to marry and perpetuate the supply 
of labor. From class to class this standard shows varia- 
tions that sometimes are exceedingly great and produce 
material differences in wages. 

Laborers of the lowest intelligence and industry are 

1 This does not mean that, as time passes and population increases, the 
marginal laborer produces less and less, so that the rate of wages steadily 
declines. Such an inference is as incorrect as the dismal conclusion some- 
times drawn from the law of diminishing returns to land (p. 81). While 
the marginal productivity of a small number of laborers must at any time 
be greater than that of a larger number, improvements in production may, 
and probably do, enable the additional workmen supplied by a growing 
population to produce as much as the marginal laborers of former periods. 
In progressive countries, at least, this is what occurred during the nine- 
teenth century 



276 THE DISTRIBUTION OF WEALTH 

likely to show little forethought in assuming the responsi- 
bilities of marriage, with the result that an adequate supply 
The supply of of such services as they are able to perform 

cfasseTof 18 can ^ e nao ^ at a ver Y ^ ow cos t — which, if COn- 
laborers. ditions are unfavorable, may be no more than 
is necessary to keep soul and body together. If immigra- 
tion is practically unrestrained, as in the United States, 
the cost of producing this grade of labor may be not that 
of rearing a family in this country, but the cost in some 
of the poorest districts of Europe. It is in such strata of 
the laboring population that the struggle for existence is 
fiercest, and the pressure of numbers upon the available 
means of subsistence most intense. Above this lowest 
class come successive grades of laborers, possessing greater 
intelligence, skill, and self-control, who insist upon having 
something better than the bare necessities of physical exist- 
ence, and who will not rear large families of children un- 
less favorable conditions of living are reasonably assured. 
At the top of the pyramid are the smallest classes, con- 
sisting chiefly of brain workers, of whom an adequate 
supply cannot be obtained unless the remuneration is 
sufficient to enable a man to give his children the best of 
commercial, technical, or professional training and all the 
other advantages which he himself has enjoyed. The 
desire of each class to maintain its position and educate 
children to a station at least as good as that of their par- 
ents, is the factor that determines the cost of each grade of 
labor. 

From what has preceded, it follows that the laboring 
population is divided into a large number of grades, between 
which little direct competition can exist, because members 



WAGES 277 

of a lower class lack either the general intelligence or the 
special training required for the work performed by a higher 
class. Labor-saving machinery of ten enables an 

. e . , r Competition 

inferior grade of workmen to compete for work between 
formerly done by a superior, and thus destroys 
the line of demarcation between the two classes. But, 
except in such cases, there can be little direct competition ; 
and this is increasingly true as we pass from the bottom 
to the top of the pyramid. Indirect competition, however, 
is much more active, since self-sacrificing parents can 
educate their children for the higher callings in life, pro- 
vided that a system of popular education affords the nec- 
essary opportunities. It is obvious that the children of a 
higher class are likely to receive a better start in life than 
those belonging to a lower; but ability and character are 
not the exclusive possession of the offspring of any one 
class, and a good system of public schools may enable the 
poorest boy to rise to the highest and most remunerative 
position. 

It must now be explained that the standard of living, and, 
therefore, the cost of production, is not precisely the same 
for all the laborers of a given class. Some supply of 
workmen will be satisfied with less than others ^thraterf 
of no greater efficiency will demand, so that a wa « es - 
little labor of any particular grade can be obtained foi 
less than must be paid for a large supply. For each class 
there is a minimum supply price, which must be paid if 
any workmen are to be obtained ; and beyond this point 
the supply can be enlarged only by raising the price 
that is offered. It is evident, therefore, that the supply 
of any grade of labor will vary directly with the rate of 



2?8 THE DISTRIBUTION OF WEALTH 

wages, rising as the rate is increased and falling as it 
decreases. 

§ 189. We have seen that the demand for labor depends 
on the value of the product of the marginal workman, and 
The normal varies inversely as the price. It is evident, also, 
wage - that the supply, depending on the cost of ob- 

taining the services of the marginal laborer who has the 
highest standard of living, will vary directly as the remu- 
neration offered. The normal wage fixed by the forces of 
demand and supply must be such a rate as will equalize 
the two forces, and call out a sufficient supply to meet the 
demand at the price which the marginal producer can pay. 
The value of labor, therefore, under conditions of health- 
ful competition, is determined in the same manner as the 
value of other things. 

It should be observed, however, that, since human lives 

are involved, the supply of labor does not adjust itself 

readily to the conditions of demand, and that 

Labor is a J 

peculiar com- it can be decreased only with the greatest hard- 
ships, and increased only by immigration or 
the gradual growth of population. These peculiarities will 
receive due consideration in the following chapter, but for 
the present it is sufficient merely to call attention to them. 
Freedom to migrate makes it easy to reduce the supply of 
labor in any market when the value falls below the standard 
of living of the marginal workmen, and unrestricted immi- 
gration renders it more difficult to adjust supply to market 
conditions. Public education and all influences that 
tend to elevate the intellectual and moral condition of the 
laborer or to increase his efficiency enable him to compete 
more effectively for a wage that will make it possible to 



RENT 279 

maintain his standard of living. Yet, after all allowance 
is made, it remains true that labor differs in important 
respects from other commodities. 

The student may have noticed that our discussion of 
the law of wages has proceeded upon the assumption that 
the family is the economic unit, and that the mt M ., . 

J The family is 

remuneration of any class of laborers must be the economic 
adequate to insure a future as well as a present 
supply of workers. Whenever the wife and children are able 
or willing to find employment, in the hope of increasing 
the earnings of the family, it usually happens that, before 
long, the remuneration of the father decreases. This is 
because it costs less to secure his services and to insure a 
future supply of workmen like him, when he is no longer 
obliged to support his entire family out of his earnings. 
We see here, also, a reason why the wages of women are 
likely to be less than those of men, even when they perform 
the same work. 1 A woman, in a majority of cases, does 
not have the burden of supporting an entire family, and 
her services can consequently be obtained for less than 
men must, upon an average, receive. Considerations like 
these are of great importance in dealing with problems 
connected with the employment of women and children. 

IV. Rent 

§ 190. When competition prevails, the normal value 
of any commodity must be high enough to compensate 

1 Frequently the work is not the same, even when it appears to be so 
upon first examination. The most efficient woman may be lost to the 
employer by her marriage at any time ; and she is actually worth less than 
a man whom the employer can expect to retain. 



280 THE DISTRIBUTION OF WEALTH 

the marginal producer for the labor and capital required 
to procure the most costly portion of the supply. Wages 
Differential and interest must be received by even the mar- 
gams, ginal producer, and more than this competition 
will not allow him to obtain. But other producers, who, 
on account of superior situation or greater ability, are able 
to supply the commodity for less than the marginal cost, 
find that a surplus is left on their hands after they have 
paid for all the labor and capital that have been expended. 
The amount of this surplus will depend, obviously, on the 
degree of superiority that the recipient enjoys over the 
marginal producer. In industries where great differences 
exist between the lowest and the highest costs of produc- 
tion (§ 53), a very considerable part of the total product 
may be absorbed by the superior producers; while the 
surplus received by the more favored establishments will 
be small if there is but a slight difference between the 
least cost of production and the greatest. 

The surpluses received by the more favored entrepreneurs 
may arise from the possession of superior natural agents 
of production or from the exercise of superior ability 
Rent and in organizing or conducting their enterprises, 
profits. j n ^ f ormer cas6j tn e surplus would be 

called rent, which may be denned as the income that ac- 
crues to the owner of a natural agent of production; in the 
latter, it would be considered profits, or the reward to the 
ability and enterprise 0} the successful entrepreneur. Both 
of these shares in the product of industry now claim our 
attention, and will be treated in the order indicated above. 
§ 191. The natural agents of production from which 
incomes are derived may be fertile soils, well-situated city 



RENT 28l 

lots, useful water powers, rich mines, or valuable forests; 
but in all cases access to them depends on the control 
of particular tracts of land, so that we may, for 

r J Rent defined. 

the sake of convenience, speak of rent as the 
return received by the owner of land. To employ a defi- 
nition which has attained considerable currency among 
economists, rent is "the value of situation with its natural 
gifts and all the rights and privileges pertaining to the 
occupancy thereof." In the sense in which the word is 
here employed, land is sharply contrasted with the im- 
provements, such as buildings, fences, walks, ditches, dikes, 
and fertilizers, which man places in or upon it. All of 
these things are products of human labor, and, in so far 
as they aid production, are but special forms of capital, 
for which interest, not rent, is received by the owner. 
Rent, as a category in distribution, includes nothing but 
the return obtained from a natural agent of production. 

Interest and rent are sometimes confused by reason of the 
fact that the selling price of any tract of land is always com- 
puted by capitalizing at the current rate of inter- t ndin 
est the annual return which the owner is able to terest not to 

, ._,.,. , .be confused. 

secure from it. If a city lot is so advantageously 
situated that it yields a rent of $5000, while the current 
rate of interest is five per cent, it will command a price of 
$100,000. But this fact throws no light whatever upon 
the reasons why an annual rent of $5000 can be obtained, 
and it is the annual rent that needs to be explained. Ob- 
viously when land is bought and sold, people will compare 
the rent with the interest derived from investments of 
capital, and will adjust the purchase price accordingly. 
Our theory of rent, however, must explain why rent is paid 



282 THE DISTRIBUTION OF WEALTH 

and what determines its amount, and not whether the 
selling value of land is sixteen, twenty, or twenty-five years' 
purchase. 1 

§ 192. Capital and labor receive their appropriate 

shares of the proceeds of industry not only because they 

add something to the product, but also because 

Value of land ° r 

depends on they must have adequate remuneration if a 
sufficient supply is to be obtained. Land, 
however, is not the product of human effort, and the pay- 
ment of rent is not necessary in order to insure a supply 
adequate for the needs of industry. The supply of land 
is virtually a fixed quantity 2 ; and the rent that it bears 
depends, therefore, on the conditions of demand rather 
than on those of supply. Like any other thing the supply 
of which is definitely fixed, the value of land depends on 
what people will give for it, not on the cost of producing 
or reproducing the supply. 

§ 193. With land used for residential purposes the 
forces governing rent may be studied in their simplest 
Rent of build- f° rm - When the handful of Dutch colonists 
mgiots. w Yio bought Manhattan Island from the 
Indians erected their first dwellings, a house lot, even 
in the section adjoining the Battery, could have had almost 

1 Twenty-five years' purchase would mean a purchase price equal to 
twenty-five times the annual rent. This would give a four per cent return 
upon the investment. 

2 There is, of course, a certain amount of " made land " which has been 
reclaimed from the water ; but it is so small in comparison with the total 
land surface of the globe as to be practically a negligible quantity. More- 
over, unlike the supply of labor or of capital, land once reclaimed generally 
does not need to be continually reproduced by the further expenditure of 
human effort. 



RENT 283 

no value, because the supply was ample and the demand 
insignificant. But as the population of the island grew 
to thousands, then scores of thousands, and finally hundreds 
of thousands, the supply of land could be but slightly 
increased by reclaiming marshes or sites along the water 
front, 1 and the value of building lots steadily rose. That 
sites on Fifth Avenue which in 1626 were worth nothing 
command to-day a princely rental is due to no other 
cause than the pressure of an increasing demand upon 
an inelastic supply of land. 

And with land used in production the case is the same. 
The demand for agricultural land or for lots on Broad- 
way comes from men who wish to establish Lan dusedin 
business enterprises, and the price offered P roduction - 
will depend on the facilities which the particular site 
affords. If the normal price of wheat is eighty cents per 
bushel, and the fertility or advantageous location of a 
farm enables the producer to place his grain in the market 
at a cost of not more than seventy cents, the landowner 
can obtain a rent of ten cents per bushel. 2 On the other 
hand, land on which wheat cannot be raised at a smaller 
cost than eighty cents per bushel will yield no rent, and 
will not be cultivated unless it can be had for nothing. 
Similarly the rent of a factory site will be measured by 
the extent to which the situation and other advantages 
reduce the cost of production below that of the marginal 



1 The original area of Manhattan Island was about 10,000 acres; and 
not more than 2500 acres of " made land " have been added to this. 

2 If each acre of the land produced twenty bushels, the rent would be 
$2 per acre; and, if the rate of interest were five per cent, the selling 
price of the land would be $40. 



284 THE DISTRIBUTION OF WEALTH 

producer. With lots occupied by stores the main con- 
sideration is the number of customers that can be reached ; 
for it is evident that, by doing a large volume of business, 
many of the expenses are made proportionately less, and 
that the savings thus effected measure the rent paid. 
If the farm or factory site or city lot happens to be occu- 
pied by the owner instead of by a tenant, the savings 
accrue to his benefit, so that he obtains a rent just as truly 
as if he had leased his land to another person. 

When competition prevails, each tract of land will 
normally be used for that purpose which will enable it 
Land used for to yield the highest rent. Fertile land adjacent 
yleTdshigh- 1 t0 a va l ua ble water power cannot be cultivated 
est rent. jf ft j s wa nted for a factory site, and arable 
land on the outskirts of cities must be cut up into building 
lots as fast as the demand for dwelling houses increases. 
Within a growing city, business encroaches upon first one 
and then another section that has been used for residen- 
tial purposes; while the choicest sites pass out of the 
hands of manufacturers or wholesale dealers, and are 
used for office buildings or for department stores. In 
all of these cases we perceive the effects of an increasing 
demand which raises the rents of the most favored tracts 
of land. 

§ 194. We must now take account of the fact that the 
prices which producers can offer for land are influenced 
r nt nd ky the operation of the law of diminishing 
diminishing returns. If the returns to labor and capital 

returns. . . . 

invested upon a given tract increased propor- 
tionately until the point was reached at which no addition 
could be made to the product, industry would be conducted 



RENT 285 

upon a few most favored sites until this absolute limit of 
productivity Were reached. A little land of the next 
inferior quality would then be utilized, the marginal cost 
of production would necessarily rise on account of the 
inferior conditions under which the additional supply 
of each commodity must be obtained, and the superior 
lands would begin to bear a rent proportional to the advan- 
tages which they afforded as compared with lands of the 
second grade. If this were the actual case, rent would 
be due simply to differences in the fertility or situation 
or other qualities of the various tracts of land that pro- 
ducers were compelled to use. 

But from our study of the law of diminishing returns 
(§ 43) we know that the product obtained from a given 
tract cannot be increased proportionally by investing 
additional labor and capital after a certain point has 
been reached. From this it follows that rent would be 
paid even if all land were equally productive, provided 
that the demand could not be satisfied without investing 
labor and capital beyond the point of diminishing returns. 
This may be shown by an assumed case. 

Suppose that a certain community has supplied itself with 
wheat by cultivating 1000 acres of the very best land, all 
equally productive, from which is, 000 bushels 

^ J r ' Di Illustration. 

were obtained at a cost of $5000 for capital and 
labor. The cost of production would be 33J cents per 
bushel, and this would be the normal price of wheat. 
But the growth of numbers now increases the price obtain- 
able for 15,000 bushels, so that additional labor and 
capital are invested in this branch of industry. Accord- 
ingly $2000 more is invested in cultivating the best lands. 



286 THE DISTRIBUTION OF WEALTH 

already in use; and it is found that, as the investment 
increases from $5000 to $7000, the product rises from 
15,000 to not more than 20,000 bushels. Evidently the 
additional 5000 bushels have been obtained at a cost of 
$2000, or 40 cents per bushel, on account of the operation 
of the law of diminishing returns ; and the price of wheat 
must advance to this figure, if the supply is to remain as 
large as 20,000 bushels. 1 At this new price, it would 
be possible to bring into cultivation a second grade of 
land upon which $2000 of capital and labor would pro- 
duce 5000 bushels, as much as could be secured by the 
additional investment upon the superior tract. Thus 
the operation of the law of diminishing returns would 
extend cultivation from the better to the poorer lands 
long before the absolute limit of productivity of the former 
had been reached. 

In this illustration the owners of the best grade of wheat 
land will receive a rent as soon as the demand for wheat 
illustration forces the investment of capital beyond the 
(continued). p [ n t of diminishing returns. Whether the 
additional supply is obtained by added investments upon 
the older land or by bringing new into cultivation, the 
rent arises from the facts that the marginal cost has 
advanced to 40 cents, and that 15,000 bushels can be 
produced upon the more favored tract at a cost of 33J 

1 The question may be asked, why need the price advance so far as 40 
cents ? The 20,000 bushels now produced cost but $7000, and a price of 
35 cents will cover the average cost of production. But with wheat at 35 
cents, producers would find it more profitable to produce 15,000 than 
20,000 bushels. The former would cost $5000 to produce, and would sell 
for #5250, yielding a rent of $250 above their cost. This surplus would 
be thrown away if $7000 should be expended in raising 20,000 bushels 
which would sell for no more than $7000. 



RENT 287 

cents. If the demand continues to rise, the marginal 
cost, either of added investments upon the better lands 
or of cultivating a still inferior grade, would once more 
increase, and rents would advance to a higher figure. 
In all cases, it is the law of diminishing returns, and not 
the fact that the absolute limit of productivity is reached, 
which forces up the marginal cost of production and en- 
ables those persons who cultivate superior lands to gain a 
surplus, or rent, over and above what they have expended 
for labor and capital. And this is as true of factory sites 
or city lots as it is of land used for agricultural purposes. 

It appears, then, that rent emerges as a share in distri- 
bution as soon as the demand for the products of the land 
becomes so great as to make it profitable, 
and therefore necessary, to invest labor and 
capital upon the best tracts beyond the point of dimin- 
ishing returns, or to resort to inferior situations. If the 
former course is followed, the amount of rent is measured 
by the difference between the product of the earlier and 
the later, or marginal, investments upon the same land; 
if the latter is adopted, rent may be measured by the 
difference in the productivity of investments upon better 
and upon poorer grades of land. In both cases it arises 
from the fact that the various parts of the supply are 
produced at varying costs, and that the earlier and more 
productive investments yield a surplus over the labor and 
capital expended. 

§ 195. It follows from what has already been said 
that rent, even a high rent, is not a cause of higher prices, 
but is caused by them. If the demand for a commodity 
exceeds the supply that can be obtained under the most 



288 THE DISTRIBUTION OF WEALTH 

favorable conditions without pushing investments beyond 
the point of diminishing returns, the marginal cost of pro- 
duction and the normal price must rise. Before 

Rent not a x 

cause of high this occurs land can command no rent, since 
an eligible location can be had for nothing; 
after it happens, the surplus earnings of the investments 
on superior lands fall to the landowner, but gs a result 
of the higher prices. This proposition has proved a 
stumbling block to many students, and seems to be an 
affront to common sense. Every business man knows 
that his rent figures among the expenses that must be 
met out of the proceeds of his enterprise, and from this 
fact he often infers that it is a factor in the marginal cost 
of production upon which the normal price of a commodity 
depends. It is not to be doubted that a man who hires 
a lot of land must recover the rent out of the price received 
from his goods; but the proposition is that the price 
which he receives is not affected by that fact. He agrees 
to pay the rent because he considers that the advantages 
of the location will enable him to do such a large business, 
or do the same amount at such a reduced cost, that he can 
afford to pay what the landowner demands. If his rent 
were remitted, he would not sell his goods for less, since 
the demand warrants the present price, and supply and 
demand would not be equalized at a lower. If, through 
a mistake, he agrees to pay more than the price of his 
product enables him to recover, his only remedy is to 
seek a less expensive location; for the competition of 
other producers will not allow him to raise his prices. 1 

1 A manufacturer of clothing who locates his establishment in New 
York does not expect to charge a higher price because his rent is higher 



RENT 289 

§ 196. Unlike interest and wages, rent is not a pay- 
ment for sacrifices which the recipient makes in order to 
assist production. The landowner neither 

x Rent an 

produces his land, nor, as landowner, assists unearned 
in the active conduct of industry, although 
he may, as capitalist or laborer, be actively employed 
and suitably rewarded for such efforts. For this reason 
rent has been termed an unearned income, and the justice 
of allowing private individuals to receive it has been called 
in question. This subject will require further attention 
when we discuss the merits of what is known as the single 
tax ; for the present, we must content ourselves with point- 
ing out that great care should be observed in applying 
the proposition that rent is an unearned income. 

The landlord, of course, does not produce his land 
and does not labor in order to obtain his rent. Yet if 
he has been a pioneer in a new country, the A needed 
increased value of his land after a new and cautlon - 
prosperous community grows up about him, may be 
regarded as no more than an adequate compensation 
for the labors and hardships of earlier days. The 
capitalist who develops a suburban district and induces 
people to purchase house lots from him, takes consider- 
able risks when he invests capital in the improvements 
that are needed to attract customers. At present, a part 
of his remuneration from such ventures comes from the 

than it would have been in a smaller city; in fact, competition of pro- 
ducers in smaller cities would not enable him to charge more. He locates 
in New York, and agrees to pay a higher rent, because the advantages 
which that city affords for his industry enable him to produce his goods 
cheaply and to pay his rent while selling at the same price as competitors 
in other cities. 



290 THE DISTRIBUTION OF WEALTH 

inciease of land values that will accrue to him if his plans 
are successful. It cannot be admitted, therefore, that 
all increase in the rental value of land is to be considered 
an unearned income, in the sense that it is in no way the 
reward for services or sacrifices of the recipient. 

Yet in all progressive urban communities, it cannot be 
questioned that the steady growth of population increases 
urban land tne rent al value of city lots without effort or 
values. appreciable risk on the part of the owners. 

As John Stuart Mill observed, "The ordinary progress 
of a society which increases in wealth, is at all times tending 
to augment the incomes of landlords; to give them both 
a greater amount and a greater proportion * of the wealth 
of the community, independently of any trouble or outlay 
incurred by themselves. They grow richer as it were 
in their sleep, without working, risking, or economizing." 
In the city of Boston, for instance, the assessors' valua- 
tions show that, between 1888 and 1903, the total site 
value of land increased from $328,000,000 to $594,000,000 
on account of the steady rise in the annual rent that it 
would yield; and it would hardly be claimed that this 
enormous increment of value was offset by equivalent 
services rendered or risks incurred by the landlords. 

Finally, it should not be forgotten that the increased 
rent which land bears as a result of social progress can 
Final consid- be considered an unearned income only for 
erations. t h e original owner, and not for a subsequent 
purchaser. A man who pays $100,000, accumulated 

1 In a subsequent chapter (§ 223), we shall see that it is by no means 
certain that landlords receive " a greater proportion " of the income or 
wealth of the community. 



PROFITS 291 

out of the "past earnings of his labor and capital, for land 
that yields an annual income of $5000, cannot be said to 
enjoy an unearned income — at least in the ordinary 
meaning of that term. In respect of the future increase 
of the rent which his land will bear, his situation will be 
different; but any income acquired by paying its capital- 
ized value is not to be considered unearned. 

V. Profits 

§ 197. We have already seen that in any industry the 
superior establishments' supply the commodity for less 
than the marginal cost of production; and 

& v ' Profits. 

that, for this reason, they secure a surplus 
return over and above the amount expended for labor 
and capital. When this superiority is due to the fact 
that the business has been organized and conducted with 
exceptional skill and good fortune, the surplus falls to 
the entrepreneur and is to be regarded as the profit that 
accrues to his skill and enterprise. Although it resembles 
rent in many respects, it can in no sense be considered an 
unearned income. 

As the term is here employed, profit means the net 
proceeds of an enterprise after all obligations have been 
met and a suitable remuneration has been Gross and 
received by the labor and capital invested. net P rofits - 
It is to be distinguished with care from the gross profits 
of a business which will usually include interest upon 
the capital or wages for the services of the manager. 
Profits are the reward purely for the risk and enterprise 
of the man who assumes the responsibility of establishing 
and conducting a business undertaking. Such a person 



292 THE DISTRIBUTION OF WEALTH 

engages to pay stipulated sums for rent, interest, and 
wages even though his books show a loss at the end of 
the year; and upon him the dangers of failure primarily 
fall, since his creditors can lose only when the results 
have been so disastrous as to more than wipe out the 
entrepreneur^ s own capital. Unsuccessful business men 
fail to meet their obligations and, becoming bankrupt, 
are constantly being forced out of the field of industry. 
By this process inefficient men are eliminated, and the 
control of labor and capital is placed in the hands of those 
who can employ them to the best advantage. Risk, 
therefore, is a very important factor in the organization 
of industry, and the person who assumes this burden 
must be suitably rewarded. 

At present the reward which lures men to exchange 

the assured income of the hired laborer or lender of capital 

for the uncertainties of business management 

Profits the . 

remuneration is the profit that may be gained in case goods 
ren erpn . ^^ ^ e p ro(mcec i f or } ess than the price nor- 
mally obtained for them. Upon his ability to produce a 
commodity for less than it costs the marginal producer to 
make it, the success of the entrepreneur depends; and 
though nothing is guaranteed him, his gains may be 
enormous. To some men the mere excitement of such 
a venture appeals strongly, while with others the greater 
freedom of the entrepreneurs position or the love of 
mastery is the stronger consideration. But without the 
prospect of a substantial gain in case of success, no one 
would exchange the assured income of the laborer or 
capitalist for the hazards assumed by the active business 
manager. 



PROFITS 293 

It will be observed that we have assumed that the mar- 
ginal producers receive no profits, and obtain merely cur- 
rent rates of interest and wages for such capital Marginal 
and labor as they themselves supply. Their in- JSSKo™" 
comes are often called profits ; but when this is profits- 
done, it is necessary to apply some qualifying adjective to 
the profits obtained by employers of superior ability, and 
to call the latter pure or net profits. In this discussion, 
however, we shall apply the word " profits" only to the sur- 
plus earnings of superior producers, and shall consider that 
marginal producers receive only such interest or wages 
as they may earn. That they can obtain nothing more 
is due to the fact that, although a man will not embark 
in an enterprise without the prospect of such rewards as 
superior producers obtain, he will be likely, after his 
investment has once been made, to continue in the busi- 
ness even though he receives nothing more than ordinary 
interest and wages. The result is that, at a price which 
covers the marginal cost for capital and labor, a sufficient 
supply will be furnished to meet the demand, so that the 
normal price cannot be high enough to yield a profit, in 
the sense in which we employ the term, to the marginal 
producer. 

The reason why marginal entrepreneurs will continue 
to produce goods upon terms that would never have induced 
them to establish their undertakings, is not Reasons for 
difficult to explain. Capital once invested thlsfact - 
cannot be withdrawn without more or less loss, and it 
may be better to receive a normal rate of interest than to 
lose part of the principal ; moreover, if a considerable 
amount of the capital has been borrowed, the closing of 



294 THE DISTRIBUTION- OF WEALTH 

the doors of the factory might mean bankruptcy. But 
in addition to this, it should be observed that an entre- 
preneur who to-day is receiving nothing more than ordi- 
nary interest and wages hopes for better times; and it 
happens not infrequently that increased exertion on his 
part, or a favorable turn of fortune, places him in a posi- 
tion where he is no longer a marginal producer and begins 
to receive profits. Then, too, so long as he can live upon 
the interest and wages that he obtains, the average man 
seems to prefer to conduct a business of his own rather 
than to become a hired laborer. These reasons, with 
others that are less important, explain the fact that an 
adequate supply of goods will be forthcoming at a price 
that leaves no profit to the entrepreneur who is on the 
margin of production. 

§ 198. Obviously the amount of profits received by 
the more favored establishments depends on the degree 
The amount of superiority which they enjoy over the mar- 
of profits. ginal producer. This advantage may arise 
from greater organizing and financial skill, which often 
make all the difference between a profit and a loss upon 
a year's transactions. The possession of superior patents 
may account for the ability to produce at a lower cost; 
for, as Mr. Mill remarks, "If the value of the product 
continues to be regulated by what it costs to those who are 
obliged to persist in the old process, the patentee will make 
an extra profit equal to the advantage which his process 
possesses over theirs." Then, too, it cannot be doubted 
that mere good fortune is an important factor in deter- 
mining the amount of profits that an entrepreneur receives 
in any particular year, although it cannot account for 



PROFITS 295 

the success which many establishments achieve over 
long periods of time. Finally, industry and integrity 
count as heavily, here as elsewhere, in favor of the persons 
who possess these cardinal virtues; and they have a 
commercial value that is despised by no one who has 
studied the conditions of permanent business success. 

§ 199. The profits of the entrepreneur, unlike interest 
and rent, are usually of a personal nature, and often of 
a decidedly temporary character. They fre- Profits a per- 
quently depend upon the life and health of s ° nalinc <>me. 
a single man; and even when caused by less transitory 
advantages, they can be preserved only at the price of 
eternal vigilance. Success, itself, may destroy them since 
it may induce a feeling of security and lead to a relax- 
ation of the efforts upon which its own continuance 
depends. Then, too, fresh talent and more youthful 
energy are constantly invading the field, inefficient pro- 
ducers are continually forced out of the business by such 
competition, and the marginal cost of production steadily 
falls. Efficiency that yields a large profit to-day, may 
to-morrow give an establishment but a slight advantage 
over the marginal producer ; and when competition 
prevails, nothing can be considered assured except that 
it is always necessary to keep abreast of the latest develop- 
ments in the industry. In this respect profits differ, to a 
marked degree, from the surplus which goes to the land- 
owner in the form of rent. 

It follows from what precedes that profits are a surplus 
of wealth saved by the superior managers of p r0 fitsa 
industry in the process of producing a commod- sur P lus - 
ity which would have required a larger expenditure of 



2g6 THE DISTRIBUTION OF WEALTH 

labor and capital under less efficient leadership. The)> 
are obtained by selling goods at prices that do not exceed 
the marginal cost of production, and, like rent, do not affect 
the value of a commodity. Prices could be no lower, 
but labor and capital would be wasted, if there were no 
entrepreneurs of an ability superior to that of the marginal 
producer. For this reason, when competition exists, 
" anger at the great captains of industry on account of 
the pure profits which they acquire is not only groundless, 
but insane. Rather it is the stupid and unsuccessful 
undertakers who deserve blame, sinking capital and 
starving laborers." 

FOR SUPPLEMENTARY STUDY 

General: Bullock, Selected Readings in Economics, 513-588; 
Hadley, Economics, 264-335; Marshall, Economics; Sea- 
ger, Introduction to Economics ; Taussig, Principles of Eco- 
nomics, Bk. V. 

Special : Carver, The Distribution of Wealth ; Clark, The Dis- 
tribution of Wealth ; Taussig, Wages and Capital. 



CHAPTER XIII 

THE LABOR PROBLEM 

I. The Labor Contract 

§ 200. The hired laborer sells his services to an employer 
for a stipulated wage. In the view of the law, his labor 
is his property, and the agreement by which Labor a 
he disposes of it is similar to any other con- commodlt y- 
tract. Legally, as well as economically, labor is a com- 
modity which the possessor has a right to sell in the best 
market obtainable. In the United States both the federal 
and the state constitutions contain various provisions that 
guarantee to citizens the right to make contracts for the 
disposal of their property, and prevent legislative bodies 
from enacting laws that destroy such freedom of contract. 
Our courts, moreover, generally insist that these consti- 
tutional guarantees shall be rigidly observed ; and they 
often set aside, as unconstitutional, laws that undertake 
to prevent certain contracts from being made between 
employers and employees. 

§ 201. But while labor must be regarded as a com- 
modity, the value of which will be governed by condi- 
tions of supply and demand, it differs from . ._ 

rr \ m Labor a 

other commodities in certain important re- peculiar 

T , , . . , ,. . . c commodity. 

spects. Indeed, it is to the peculiarities of 
this commodity that we must attribute the chief respon- 
sibility for the existence of such a thing as a labor problem. 

2Q7 



298 THE LABOR PROBLEM 

In the first place, the laborer and his commodity are 
inseparable, and do not part company when an employ- 
The laborer ment contract is made. "It matters nothing 
modliyarT" to the seller of bricks whether they are to be 
inseparable, used in building a palace or a sewer; but it 
matters a great deal to the seller of labor, who under- 
takes to perform a task of given difficulty, whether or not 
the place in which it is to be done is a wholesome and 
a pleasant one, and whether or not his associates will be 
such as he cares to have." From the very nature of the 
case the person who sells labor is vitally interested in 
the conditions of employment; while, on the other hand, 
the buyer has to exercise some control over the seller. 
The employer usually determines the place of work, and 
sometimes even the residence of the laborer; he has more 
or less control over the associates of a workman; and 
upon him depend many things that affect vitally the wek 
fare of the employee, such as the hours of work, sanitary 
conditions, and safety of life or limb. Under such cir- 
cumstances there is far more opportunity for ill will and 
serious friction between the parties to an exchange than 
there can be in contracts for the sale of other commodities. 

In the next place, labor is more like a perishable than 
a durable commodity, since there is often a certain ele- 
compuision ment of compulsion in its sale. The hired 
to sen labor. i a b orer commonly has little or nothing upon 
which he can fall back for support, so that he must 
dispose of his commodity at once for whatever price can 
be obtained; whereas "the seller of other goods, by the 
very fact that he has them to sell, has some capital upon 
which he can live while he is trying to make a satisfactory 



THE LABOR CONTRACT 299 

contract." Moreover, poverty and ignorance may pre- 
vent a man from offering his labor in the most favorable 
market, and compel him to sell it in one that is already 
glutted. When such conditions are taken into the account, 
it is obvious that the person who offers labor in exchange 
for daily wages is not infrequently in a less favorable 
position than the seller of other commodities. 

A third peculiarity is connected with the one first men- 
tioned: the supply of labor changes very slowly, and 
only through changes in the number of laborers. The supply of 
The supply of other commodities can be de- j^pSSSS* 
creased by stopping production; but it is far m ann er. 
less easy to decrease the number of laborers when falling 
prices lead to a partial suspension of productive industry 
and throw many men out of employment. When a de- 
creased demand for labor causes low wages and lack of 
employment, large numbers of unemployed laborers press 
into the market and bid for work. Thus a decreased 
demand may bring an increased supply of labor into the 
market. On the other hand, when demand begins to 
increase after a period of hard times and low wages, a 
"reserve army" of unemployed laborers, "which the poor- 
houses at the expense of the whole population had sup- 
ported ... as long as dullness in the business continued," 
presses into the labor market and increases the supply. 

§ 202. When due importance is assigned to the pecul- 
iarities which this commodity presents, it is clear that 
there must often be less actual freedom in a 

Summary. 

contract for the sale of labor than in that for 

the sale of most other things. Legally the laborer may 

do as he pleases; but as a matter of fact, he often has 



3oo 



THE LABOR PROBLEM 



no alternative and must accept any terms that are offered. 
When a woman, a child, or one of a struggling crowd of 
men at a factory gate, stands before the employer who 
represents a capital of a million dollars, there is little 
real equality in the terms upon which bargaining proceeds ; 
and, for this reason, efforts have been made to improve 
the conditions of employment by legislation and the 
formation of labor organizations. 

II. Labor Legislation 

§ 203. The growth of the factory system in England, 

as the result of the Industrial Revolution, partly produced 

and partly brought to light a multitude of 

English fac- v J & b 

toryiegisia- evils that called for some effectual remedy. 
Early in the nineteenth century women and 
children were employed in factories and mines under 
conditions that were destructive of body and soul; for 
all operatives the hours of labor were prolonged beyond 
human endurance, and little or no care was taken to 
protect workmen from the most dangerous accidents. In 
1802 Parliament passed the first of a series of factory 
acts, which, while nominally restricting the laborer's 
freedom of contract, have gradually effected a material 
improvement in his condition. As systematized and ex- 
tended since 1878, these laws now prohibit the employ- 
ment of children under a certain age, and limit the hours 
that women and children can be employed in various 
industries; moreover, they enforce suitable ventilation 
and the proper sanitation of factories, and require that 
safety appliances shall be used whenever dangerous 
machinery is employed. The factory acts applied at first 



LABOR LEGISLATION' 30 1 

only to women and children, and at present interfere less 
with labor contracts made by adult males than with those 
of other classes of laborers ; yet in a number of instances 
restrictions have been imposed upon callings that are 
followed chiefly or exclusively by men. 

§ 204. Like the English factory acts, American 
legislation applies chiefly to women and children, although 
men engaged in the same industries are affected 

° ° Details of 

indirectly by the statutes. Our laws pro- American 
hibit the employment of children under certain 
ages, and limit the number of hours that women and 
children can labor in factories and workshops. They 
frequently require the proper ventilation and sanitation 
of factories, and the fencing of dangerous machinery. 
In some cases statutes call for weekly payments, prohibit 
company stores or truck payments, and even regulate 
the employment of adult males in certain industries that 
are considered especially dangerous to the health of the 
operatives. In many cases the letter of the law is far 
stricter than its enforcement, and sometimes factory acts 
are partly inoperative on account of the absence of a 
competent body of state inspectors. The least has been 
accomplished in the South, where the recent growth of 
factory industries has produced certain conditions that 
call loudly for effective regulation. 

§ 205. Not infrequently the courts have declared cer- 
tain kinds of labor laws to be unconstitutional upon the 

ground that they have invaded the citizen's „ _ A . 
J Constitution- 

freedom of contract. The decisions of the aiity of labor 

. legislation. 

courts of one state sometimes conflict with 

those of others, and some of the problems involved seem 



302 THE LABOR PROBLEM 

to depend largely upon latitude or longitude; so that it 
is not easy to say just how far an American legislature 
can lawfully proceed with labor legislation. Laws regu- 
lating the labor of minors are generally upheld, because 
such persons are not yet in a position to make independent 
contracts, and, in a sense, are wards of the state. In 
some states laws regulating the employment of women 
have been held to be unconstitutional; and, in nearly all 
cases, restrictions upon the hours that adult males shall 
work have been set aside by the courts. Yet a few years 
ago the Supreme Court of the United States upheld a 
statute of Utah by which the employment of men in mines 
and smelters was limited to eight hours per day. So far 
as any clear principle can be distinguished in the tangle 
of conflicting opinions, it appears to be held that an act 
that has the effect of interfering with contracts made by 
adult males or females is constitutional only when it can 
be deemed a valid exercise of the police power of the state, 
this power being that of making such wholesome ordinances 
as are needed for the health, safety, or morals of its citizens. 
Laws requiring the proper ventilation and sanitation of 
factories would seem, upon their very face, within the 
scope of the police power; but acts limiting the hours 
that women shall work are not so clearly included, though 
it is probable that most courts will uphold them. With 
the contracts made by adult males, legislative interfer- 
ence is hardest to justify. In a mine or a smelter the 
propriety of state regulation is, obviously, less doubtful 
than in such an industry as agriculture; while in the 
case of a railway, the safety of travelers is involved, and 
the enforcement of reasonable hours would seem to be 



jlabor legislation 303 

clearly admissible. The final outcome will probably be 
that the courts will find ways by which they can uphold 
the constitutionality of such legislation as experience 
shows to be necessary for the public welfare. 

§ 206. Laws that enforce proper ventilation and sanita- 
tion of factories, or require adequate provision for the 
safety of laborers, need at this date no justifi- Economic 
cation. Few disinterested persons will ques- JSoriegfeia- 
tion the propriety of such regulation of the tion - 
conditions of employment. The restriction of child 
labor also requires no defense, even though many of our 
states now fall far short of performing their duty to the 
little victims of employers' greed or parental neglect. 
With the hours that adults shall work, the propriety of 
governmental interference is not so generally conceded. 
Undoubtedly there is a reasonable limit for the working 
day; but this differs from industry to industry, accord- 
ing to the healthfulness of the work or the intensity of 
exertion that is required. For this reason it is difficult 
to establish a general rule. The twelve or fourteen hour 
day of a former generation is, beyond question, too long 
for the welfare of the worker; but it is not clear that nine 
or ten hours is an excessive number to require in the aver- 
age occupation, although there are some industries where 
eight hours, or even less, are all that should be demanded. 
In the past, reductions in the hours of labor from four- 
teen to twelve and from twelve to ten have probably 
increased the efficiency of the workman enough to offset 
the loss of working time. A further reduction to nine 
hours, or even to eight, may have a similar effect in some 
cases; but in others it probably decreases the product, 



304 



THE LABOR PROBLEM 



and ultimately lowers the wages that can be paid. A 
uniform eight-hour day, which is often advocated, may 
yet be attainable; but it can come, if it is to be reached 
without reduction of wages, only by repeated experiments 
in one industry after another, and upon condition that the 
efficiency of the laborer increases pari passu with the 
decrease of time that he works. To introduce it by legis- 
lation would be unwise, even if it were constitutional. 

III. Labor Organizations 

§ 207. Although combinations of craftsmen existed in 

some English towns during the eighteenth century, the 

modern labor organization did not make its 

Growth of ° . 

labor organi- appearance until the Industrial Revolution 
had prepared the conditions that were neces- 
sary for its growth. The aggregation of capital into large 
masses, one of the most striking results of the Revolu- 
tion, tended to widen the distamce between employer 
and employee, and to develop class feeling among the 
laborers. In the small workshops of former times, in 
which the employer worked with the aid of a few journey- 
men, constant personal intercourse existed; while since 
comparatively little capital was required to establish an in- 
dependent enterprise, the average journeyman could look 
forward to the day when he should be master of his own 
establishment. But all this was changed by the growth 
of the factory system. With the hundreds or thousands 
of men in his vast establishment the employer could no 
longer have that intimate intercourse which had served 
so often to promote good will and to remove causes of 
discontent. And, at the same time, the enormous amount 



LABOR ORGANIZATIONS 305 

of capital needed for a modern factory made it impossible 
for the average laborer to expect to rise above his station 
and become an independent producer. Such condi- 
tions made it inevitable that, as the distance between 
employer and employee widened, laborers should resort 
to common action in order to protect and advance the 
interests of their class. 

§ 208. Organization has usually been effected through 
combinations of workmen in the same craft or trade, and 
in this manner the trade union has been devel- The trade 
oped. It has proved difficult to unite men union " 
of different trades into a single association, since there 
is little community of feeling and may be considerable 
diversity of interest among them ; while unskilled laborers 
are the hardest of all to organize, probably because they 
are usually of a lower order of intelligence and are united 
by fewer apparent ties of common interest. The result 
is that trade unions, even in seasons of greatest prosperity, 
have never represented more than a fraction of the whole 
body of laborers. At the present moment there may 
be 3,000,000 laborers in the various organizations that 
exist in the United States, but this number is not more 
than one twelfth of the whole body of persons engaged in 
gainful employments, or more than one tenth of the 
entire number of hired workers. But in various indus- 
tries, usually those in which skilled labor is required, the 
proportion is far larger, and it sometimes exceeds one half 
of all the persons in the trade. 

At various times efforts have been made to unite all 
classes of laborers, including unskilled workmen, in a 
single organization. In this country, the Knights of 



306 THE LABOR PROBLEM 

Labor, organized upon this basis, secured a large mem- 
bership between 1883 and 1887, increasing their num- 
Knightsof hers from about 52,000 in the former year to 
Labor. nearly 1,000,000 in the latter. But then a 

reckless policy with respect to strikes, conflicts with trade 
unions, and a disposition to enter politics brought about 
the overthrow of the association, which, in 1893, was 
supposed to have but 40,000 paying members. Its fail- 
ure taught labor leaders the necessity of organizing along 
trade lines, and during the past decade the trade union 
has again to come to the front. 

The trade unions, however, have found it desirable 

to cooperate for certain purposes, and have established 

the American Federation of Labor, which, 

American 

Federation between 1 89 7 and 1903, increased its member- 
ship from 265,600 to 1,605,500. The federal 
form of organization has permitted each trade to preserve 
its autonomy, and yet has made it possible to cooperate 
for certain ends. Besides aiding the eight-hour move- 
ment and advocating labor legislation, the Federation 
now keeps a considerable force of organizers in the field, 
and has had, in recent years, some success in forming 
unions of unskilled laborers. Aiding rather than attempt- 
ing to rival the organizations existing in separate trades, 
the Federation has now gained the leadership of the 
American labor movement. 

§ 209. The objects of labor organizations are various, 
but their chief purpose is to better the eco- 

Objects of x x 

labor organi- nomic condition of the workmen. While many 

of them endeavor to improve the education 

and the morals of their members, or to promote social 



LABOR ORGANIZATIONS 307 

intercourse, and while valuable results are sometimes 
accomplished in these directions, the labor unions are 
interested chiefly in bettering the conditions of employ- 
ment, advocating favorable legislation, and providing 
insurance against accident, sickness, or death. 

Both in the United States and in England, the trade 
unions have exerted some influence upon legislation, but 
this feature of their work can be given no i nsurance 
further attention here. Their insurance schemes - 
schemes are often useful to the organizations themselves 
in attracting new members and providing a method of 
disciplining the disobedient or unruly, who, through 
expulsion, lose their interest in any funds that have been 
accumulated. But considered purely from the stand- 
point of the security which they afford, the arrangements 
of the unions are not so advantageous for the insured. 
Usually insurance funds are not separated from the other 
resources of the unions, and may be expended in aid of 
strikes, so that those who pay money for one purpose 
may see it disbursed for another. Then, too, the rate of 
assessment has not always been high enough to place 
the schemes upon a sound financial basis. In these 
respects there is much room for improvement, and it is 
to be hoped that more of the unions will follow the exam- 
ple of the Locomotive Engineers in effecting an absolute 
separation of strike and insurance funds. 

With respect to the conditions of employment, the unions 
endeavor to secure shorter hours of work, better wages, 
and, sometimes, the exclusion of workmen conditions of 
that refuse to join their organizations. In em P lQ y ment - 
these matters it is possible for a combination to secure 



308 THE LABOR PROBLEM 

better terms than individual workmen would often obtain, 
on account of the unequal intelligence, resources, and 
tactical advantages of the large employer and the single 
laborer. It is not correct to say, as is sometimes done, 
that workmen unorganized would be absolutely helpless 
in the hands of their employers, since in times of expand- 
ing trade the demand for labor is so great that the advan- 
tage is not wholly with the capitalist. It is also true that, 
when business becomes less brisk and the demand for 
labor declines, the strongest unions cannot avert the 
inevitable consequences of such a condition of the labor 
market. But when all this is conceded, it remains true 
that a well- organized union can make wages rise more 
promptly as the prices of commodities advance, and 
minimize the loss that laborers suffer when the market 
begins to fall. Moreover, in what may be called "sweated 
trades," where ignorance, poverty, and an excessive supply 
of labor have reduced wages below the level required 
for a decent subsistence, it is possible for a union to infuse 
hope and courage into the workers, and enable them to 
better their condition very materially. 

§ 210. When wisely conducted, a union may be a highly 
desirable means of securing the healthy operation of 
Possible ad- competition in the market for labor. By 
Tab^Saifi- ma king the strength of the parties to the con- 
zations. tract substantially equal, it can oblige em- 

ployers to pay all that the market will enable them to give ; 
while, by assisting its members to migrate to places where 
the demand is active, it can distribute the supply of labor 
in the manner that is most advantageous to the community. 
By accumulating a reserve fund upon which its members 



LABOR ORGANIZATIONS 309 

can subsist while temporarily out of employment, it enables 
the workman to reserve his commodity until he finds 
such conditions as he deems advantageous to himself. 
The satisfactory working of the laws of supply and demand 
requires that laborers, as well as employers, shall be intel- 
ligent, alert, and able to seek their own advantage — a 
condition which the union endeavors to maintain. 

§ 211. A few words should be said concerning two 
things which are now cardinal points of trade-union policy, 
— the standard wage and the union, or closed- The stan dard 
shop. In adjusting wages the unions usually wa & e - 
demand a standard rate for all their members, except per- 
haps a few older or less competent workmen who may 
be permitted to accept less. Theoretically this is a mini- 
mum wage, and there is nothing to prevent an employer 
from paying more; but in practice it is often a maximum 
rate beyond which superior workmen do not advance. 
This is due sometimes to the fact that the minimum is 
placed so high that many employees do not earn all they 
receive, so that it is impossible to pay more to the better 
workmen, who must carry the poorer upon their backs. 
Or, in other cases, it arises from a disinclination upon 
the part of unionists to allow any of their members to 
do more than a certain amount of work, — a matter to 
which we shall return in a later paragraph. 

It is even urged that the standard rate should be main- 
tained at all times, no matter what the condition of the 
labor market may be, and that when the 
demand for products declines and prices fall, 
an employer should be obliged to go out of business rather 
than be allowed to cut wages. This method disposes of 



310 THE LABOR PROBLEM 

the employer, but it does not provide for the payment 
of the standard wages after he goes out of business; in 
fact it would merely increase, in times of depression, the 
army of the unemployed by whose competition ultimately 
the standard rate would be broken down even in those 
establishments that might maintain their solvency. With 
the progress of industry it is possible and desirable that 
the rate of wages should steadily advance, but its upward 
movement cannot be continuous, irrespective of the con- 
ditions of the market. So long as conditions of business 
fluctuate, the rate of wages cannot be unaffected by 
this fact. Unions can demand a higher rate in every 
period of rising prices, but with a falling market it is idle 
for them to refuse to make concessions. 

§ 212. As labor organizations increase in strength 
and numbers, they often demand that shops or factories 
The closed snan ^ e cl° se d to all workmen who cannot 
shop: produce a union card. When this is done 

in order to combat the efforts of employers to break up 
the unions by constantly displacing their members in 
order to make room for outsiders, it would seem to be a 
justifiable weapon of defense. But in cases where no 
discrimination is practiced against unionists, the demand 
for a closed shop cannot be justified. It means nothing 
more or less than that a private association attempts to 
deny the right to work to all who will not join its ranks, 
and it can be enforced only by arousing the worst passions 
of human nature against the man who refuses to join a 
union. 

In defense of the closed shop it is argued that a union 
secures better conditions in its trade, by which all laborers 



LABOR ORGANIZATIONS 311 

are benefited, and that these advantages should not be en- 
joyed by persons who have not contributed to obtain them. 
But, if this is true, it does not follow that the (a) i nvo ives 
union should oblige outsiders to contribute; "*****• 
as well might a church, upon the plea that its good offices 
benefit the entire community, attempt to tax every one 
for its support. If it is necessary to force contributions 
to unions or to churches, the authority of the govern- 
ment must be invoked, because private organizations 
cannot be allowed to undertake the one thing or the other. 
At present the theory upon which we proceed is that both 
churches and labor unions are best conducted when they 
appeal to the reason or the interests of their supporters; 
and if compulsion is to be employed in either case, this 
should proceed from the government and not from a 
private organization. 

While monopoly might not result from the establish- 
ment of the closed shop, provided that a union opened 
its doors to all competent persons who would 
enter the trade, there would be great danger listicinits 

. _ tendencies. 

of a different outcome. By imposing high 
initiation fees, requiring long apprenticeships, and giving 
unfair advantages to the children of its members, a union 
could easily become the master of the situation, and abuse 
its powers for selfish ends. Labor organizations are 
subject to all the infirmities that combinations of capitalists 
display, and there is no reason for thinking that a monopoly 
of labor is at all preferable to a monopoly of capital. Capi- 
talist and laborer alike need to be kept upon their good 
behavior by the pressure of competition, and the public 
must suffer when either of them acquires a monopoly. 



312 THE LABOR PROBLEM 

§ 213. It is often charged that trade unions restrict the 
amount of work which their members do. They are also 
Restriction believed to exercise an unfavorable influence 
of output. U pon industrial efficiency. In considering the 
matter it should be remembered that there are certain 
reasonable limits to the amount of labor that any one 
should perform. In a trade that demands severe physical 
exertion or exposure to more or less unhealthful condi- 
tions of employment, there is a pace that makes a work- 
man old at forty, and one that will enable him to do a 
man's work still at the age of sixty. If a union does no 
more than oppose over-driving and endeavors to insure 
to its members forty instead of twenty years of efficiency, 
its course is morally and economically justifiable. But, 
unfortunately, this is not always the whole of the story. 
In a few cases the regulations of unions have forced an 
unreasonable restriction of the output; and, in a some- 
what larger number, a tacit agreement among the members 
has had the same result. The precise extent of this evil 
is hard to determine, and sweeping statements should be 
avoided. Here and there in the building trades, daw- 
dling has sometimes been reduced to a fine art, and one 
can occasionally observe elsewhere that union workmen 
are acquiring the most leisurely habits of work. It 
should be remembered, however, that laziness is older 
than trade unionism, and that the unions can be held 
accountable only for cases in which their influence has 
tended to increase this evil. Such instances undoubtedly 
exist, but more evidence than has so far been adduced 
would be needed to justify any more positive statement 
than we have made. 



LABOR ORGANIZATIONS 313 

§ 214. The growth of labor organizations has led to 
much friction between employers and employed, the two 
parties resorting to such weapons as the lock- strikes and 
out and the strike, the blacklist and the boy- lockouts - 
cott. In the United States no less than 22,793 strikes 
occurred between 1881 and 1900, involving 117,509 estab- 
lishments and 6,105,694 employees, while during the 
same period employers in 9933 establishments locked 
out 504,307 men. In these contests the laborers sacrificed 
$306,682,000 in wages, and the employers are supposed 
to have lost $142,658,000, while the inconvenience occa- 
sioned to the public defies all computation. Fifty per 
cent of the strikes and a similar proportion of the lock- 
outs are reported to have been successful, while thirty- 
six per cent of the former and nearly forty-three per cent 
of the latter failed completely. In the remaining cases 
compromises of one sort or another were finally effected. 

In the industrial warfare represented by these statistics 
the laborers often endeavored to enforce their demands 
by the boycott, which is an organized effort industrial 
to persuade or intimidate other persons from warfare - 
having dealings with their employers; and the employers 
made more or less use of the blacklist, by which they 
attempted to boycott obnoxious members of the unions. 
Both of these weapons are illegal, and deserve the severest 
condemnation, since they constitute a direct interference 
with the rights of others. The mere strike, however, 
and the lockout are in themselves perfectly lawful acts, 
although they may be accompanied by objectionable 
features. They have often led to violence and the loss 
of life and property, and recently, in the state of Colorado, 



314 THE LABOR PROBLEM 

they have produced a condition that can be described 
only as civil war. In most cases the interests of the public, 
the third party to the transaction, have been ignored by 
both contestants, as was made manifest in the great coal 
strike of 1902. 

The responsibility for such conditions is sometimes laid 
at the door of labor organizations, but not more than half 
ResponsiMi- of it belongs there. The workmen have often 
ity divided. ma( j e unreasonable demands; they have been 
arrogant and selfish in too many cases, and have some- 
times suffered from outbreaks of homicidal mania. But, 
on the other hand, the reasonable demands of labor have 
often been met with insolent refusals to treat with the 
representatives of any organization ; the unlawful boycott 
has been met with the equally unlawful blacklist; and 
violence to non-unionists has been met, as in Colorado, 
by intimidation of the members of the unions. In 1904 
the labor organizations of the country were fighting against 
inevitable reductions of wages in the face of a falling 
market, while employers were forming associations for 
the purpose of exterminating unionism, root and branch. 
Neither attempt could succeed, and the net result was 
loss to both sides and great inconvenience to non-com- 
batants. 

§ 215. The losses and disturbances occasioned by 
labor controversies have called forth various plans for 
conciliation, remedying such difficulties. One expedient 
S°n P t C a g U re C e- 1S ' has been the establishment of joint boards 
ments. f conciliation in various trades. In these 

schemes employers and laborers in individual establish- 
ments have appointed shop committees before which 



LABOR ORGANIZATIONS 315 

complaints can be brought for calm and fair consideration 
before they lead to serious disputes; or employers' asso- 
ciations and labor organizations covering entire trades 
have arranged prices and conditions of employment for 
definite periods of time, and have agreed to submit to 
boards of arbitration all disputes that may arise concern- 
ing the interpretation of the contracts. When such 
methods have been tried in good faith, it has been found 
that many causes for disputes can be removed by a friendly 
conference; both employers and laborers have taken 
care to avoid mistakes, and have sometimes shown in- 
creased respect and consideration for one another. In 
some cases strikes and lockouts have been avoided for 
considerable periods of time ; and it has been demonstrated 
that the conflicting claims of labor and capital can be 
adjusted upon a basis of reason and justice without appeals 
to the wager of battle, and, withal, in a spirit of mutual 
good will. 

When disagreements between employers and laborers 
have led to an open rupture, both parties have sometimes 
consented to submit their cases to arbitration voluntary 
by some fairly constituted tribunal. A few arbitration - 
of our states have established boards of conciliation and 
arbitration, the services of which are placed at the disposal 
of laborers and capitalists. In Massachusetts something 
has been accomplished in this manner, especially in the 
settlement of controversies that have not yet led to an 
open rupture. Even here, however, the plan has not 
prevented the occurrence of serious strikes ; while in other 
states, the public boards of arbitration have often fallen 
into the hands of politicians for whom neither laborers 



316 THE LABOR PROBLEM 

nor capitalists have entertained much respect. During 
the past decade the prestige of state boards of arbitration 
has declined; and the shop council and the trade agree- 
ment now seem to be the favorite expedients for obtaining 
industrial peace. 

In view of the facts that no other method has been 
entirely successful in preventing strikes, and that, in many 
compulsory cases, one side or the other seems reluctant 
arbitration. tQ adopt any measure f Te ]i e f t it has been 

proposed to compel laborers and capitalists to settle their 
disputes in courts of law. The Australasian states have 
established systems of compulsory arbitration, and their 
experiments are now being watched with considerable in- 
terest. But compulsory arbitration, except, perhaps, 
in a few industries that have a public character, would 
undoubtedly be unconstitutional in the United States; 
and it is not at present favored by either laborers or capi- 
talists. At best it presents very serious difficulties, the 
first of which is to devise practicable methods of enforcing 
decisions that are unfavorable to laborers. 1 In New 
Zealand the workmen are obliged to organize unions 
before they can appeal to the arbitration courts; but 
unless the union possesses a large amount of property, the 
members can drop out rather than work under conditions 
that they do not wish to accept. The New Zealand plan 
worked smoothly until, in a period of bad times, the 
labor courts made a number of awards unfavorable to 
the workmen, when several troublesome strikes occurred 

1 The employer, of course, gives hostages when he establishes his enter- 
prise, since he places himself in a position that makes it easy to enforce an 
award unfavorable to him. 



LABOR ORGANIZATIONS 317 

in spite of the law. It has not, then, prevented strikes, 
but has undoubtedly diminished the number of them. 
The other serious difficulty in compulsory arbitration 
arises from the fact that it is a very delicate matter for 
an outsider to determine what rates of wages 

Criticism. 

employers must pay and employees accept. 
The only motive for offering wages is the desire to make 
a profit, and if the prospect of obtaining this is destroyed 
by decree of a court, the natural result would be to decrease 
the demand for labor and the wages that can be paid the 
workmen. On the other hand, the employee, although he 
can be compelled to submit to conditions that he finds 
distasteful, cannot be obliged to render willing and effective 
service, even though he is forced to perform a certain 
amount of labor. Certain American states have recently 
established wage commissions having power to fix mini- 
mum rates of wages in occupations where women are 
employed, and we shall soon have valuable evidence 
concerning the practical working of public regulation 
of wages in certain industries. 

§ 216. Disputes between labor and capital will continue 
so long as industry is organized on its present basis ; and 
the only thing that can be expected is that need- 

Summary. 

less controversy will be avoided, and that each 
contestant will respect the rights of the other and those of 
the public. Through shop councils and joint agreements 
much can be accomplished, and relentless punishment 
of unlawful tactics will remove a great part of the incon- 
venience which non-combatants now suffer. As labor 
organizations grow older and acquire property, they 
become more conservative; and employers are slowly 



318 THE LABOR PROBLEM 

learning that the trade union has come to stay, and that 
laborers are entitled to have a voice in determining the 
conditions under which they work. It is useless to hope 
for an industrial millennium ; but occasions for controversy 
will be removed in proportion as labor and capital acquire 
respect for each other's strength, and each considers fairly 
the just claims of the other. 

IV. The Relation of Laborers to the Product of their Labor 

§ 217. Irrespective of any influence that trade 'unions 
exert, experience shows that laborers receiving time wages 
Time and are likely to have less incentive than they 
piece wages. neec [ f- j- urn 0U £ a l ar g e product. Piece wages, 

therefore, have been introduced in many industries, in 
order to give the workman a greater stimulus to diligent 
effort. Not infrequently employers have introduced piece 
wages and secured a larger product from each laborer, and 
then have reduced the rate paid per piece, so that an em- 
ployee must work much harder than before in order to 
make as much as his former time wages. Naturally 
enough, such experiences have led many laborers to look 
with suspicion upon proposals to adopt piece wages, and 
to refrain from increasing their output even when the 
system has been introduced. Yet in many industries 
payment by the piece prevails, and by fair treatment the 
opposition of the wage earners has been overcome. 

§ 218. Another method of adjusting the remuneration 
of the laborer is what is known as a progressive wage. 
Progressive Employees have been guaranteed a minimum 
wages - time wage, and then offered a premium for 

attaining a certain degree of efficiency; or piece rates 



LABORERS AND THEIR PRODUCT 319 

have been adjusted upon a progressive scale, the rate 
per piece rising slightly as the output increases. In 
some cases progressive wages have increased the prod- 
uct by as much as fifty, eighty, or even one hundred 
per cent. They may be a desirable method of remunera- 
tion in some occupations; but, when they combine a 
minimum time wage with a premium for efficiency, they 
are less advantageous for the laborer than a simple piece 
wage. 1 

§ 219. Profit sharing is a plan which is designed to 
give the laborer an inducement to work more efficiently, 
and to secure greater harmony of interest p ron tshar- 
between employer and employee. It offers ing * 
the laborers, beside their usual wages, a share in any 
profits realized from the business over and above a certain 
minimum amount considered to be the necessary remunera- 
tion of the proprietor, the portion of each employee being 
determined upon some equitable basis. In some cases 
this arrangement has given laborers an inducement to 
increase the product, improve its quality, or economize 
in the use of materials, so that by the efforts of the partici- 
pants themselves profits have been increased and the re- 
muneration of the workers enlarged. But much more 
often it has turned out that the profits exceed but little, 
if at all, the minimum sum reserved for the proprietor; 
and, therefore, the laborers have had only the slightest 
interest in the working of the schemes, not hesitating to 
strike if there was any prospect of immediate advantage 
from such a source. 

1 The premium paid for exceeding a certain product is usually less than 
a proportionate addition to the time wage. 



320 



THE LABOR PROBLEM 



As a scheme of distribution, profit sharing is open to 
serious objections. The profits of a business can be 
increased by greater diligence on the part of 
laborers, but they depend so largely upon the 
skill exercised in buying materials, organizing produc- 
tion, and disposing of the product, that their amount does 
not and cannot vary proportionately to the increased 
zeal and efficiency of the employees. Laborers may 
increase the product ten per cent, or reduce its cost in 
corresponding proportion, but bad business manage- 
ment may result in an actual loss upon the year's transac- 
tions. In this case the extra exertion of the employees 
would reduce the extent of the losses, but would bring 
no extra remuneration. On the other hand, if the profits 
distributed are not created by extra exertion upon the 
part of the workmen, but arise from greater skill in the 
management of the business, they become a mere gratuity ; 
and the whole scheme works unfairly to the employer. 

Too often profit-sharing arrangements are so contrived 
that they have the evident purpose of detaching laborers 
Further con- f rom the trade unions, and of hampering their 
siderations. freedom of action. When participation in 
profits is deferred for a period of years, or confined to 
operatives who have been in the employ of the firm for a 
considerable length of time, the effect of the plan is too 
obvious to need discussion. Moreover, if the prospect 
of sharing in profits is held forth, laborers are less likely 
to demand higher wages at times when workmen in other 
establishments are securing advances; and it has often 
turned out, when profit sharing has lasted for a number 
of years, that the stipulated wage paid each employee 



LABORERS AND THEIR PRODUCT 32 1 

plus his share in the profits was no more than the market 
rate of wages. In some instances profit sharing has 
increased the remuneration of laborers and promoted 
a better understanding between employers and employ- 
ees, but it has more often disappointed the hopes of its 
advocates. As a permanent solution of the labor prob- 
lem, it is hardly entitled to serious consideration. 

§ 220. Cooperation (§ 34) proposes to remove friction 
between employer and employee by eliminating the em- 
ployer. It is usually said to have two forms, 
distributive and productive. The former, 
however, is nothing more than the cooperation of con- 
sumers in order to get rid of the so-called middleman, 
and affects in no appreciable way the labor problem. In 
England it has resulted in the growth of a considerable 
number of successful stores, and in the United States 
has had somewhat less success. Productive cooperation, 
on the other hand, is a serious attempt to grapple with 
the problems of labor. Societies of workingmen contribut- 
ing some capital, and often borrowing a part, have devel- 
oped in England a number of prosperous enterprises, 
and have sometimes succeeded in the United States. 
In France, Belgium, and a few other countries experi- 
ments with cooperative production are now being tried 
»n a considerable scale. 

Whenever cooperative enterprise is practicable, it pos- 
sesses very obvious advantages over the wage system. 
Self-employed workers have shown activity itsadvan- 
and zeal that hired laborers seldom exhibit, tages * 
frugality and saving have been encouraged by the strong- 
est possible inducements, while the responsibility of pro- 



322 THE LABOR PROBLEM 

prietorship and the experience in business management 
have had an excellent moral and intellectual influence 
upon the cooperators. The system, of course, eliminates 
strife between the employing and laboring classes. 

But many difficulties beset the path of cooperators 
The success of any enterprise depends inevitably upon 
itsdifficui- the ability with which it is managed, and 
ties- cooperators must contrive somehow to secure 

the most efficient leadership if they hope for success. 
They may appoint a shop committee to direct their affairs, 
or secure, from their own ranks or elsewhere, a superin- 
tendent or manager. With the committee system respon- 
sibility and power are divided; and with both systems 
the management may be hampered by differences of 
opinion among the rank and file of the association. Then, 
too, when able managers are found, cooperators are not 
always willing or able to pay enough to retain the services 
of such men. In many cases, also, it has been hard for 
managers who owe their positions to the good will of the 
men under their direction to enforce the best of discipline. 
In general, cooperation has succeeded best in industries 
of a less complex character, where skillful management 
counts for less and efficient workmanship is of more avail. 
Finally, it is difficult for laborers to secure, especially 
at critical times, the capital needed to establish and develop 
their enterprises. Not infrequently when conspicuous 
success has been attained, the very need of additional 
capital to extend the undertaking has resulted in the 
control of the establishment passing to outside capitalists, 
and true cooperation has thus come to an end. Up to 
the present time the various difficulties here enumerated 



LABORERS AND THEIR PRODUCTS 323 

have usually circumscribed narrowly the field within 
which cooperative production can succeed. The system 
is, undoubtedly, an ideal one whenever practicable; but 
for a long time to come the large majority of business 
undertakings will be managed by the entrepreneur, who 
seems best able to insure to society efficient direction of 
its productive forces. 

FOR SUPPLEMENTARY STUDY 

General: Hadley, Economics, 336-369, 404-421; Seager, Intro- 
duction to Economics, 385-433; Taussig, Principles of Eco- 
nomics, Bk. VI. 

Special : Adams, Labor Problems ; Commons, Trade Unionism and 
Labor Problems ; Gilman, Methods of Industrial Peace ; Rae, 
Eight Hours for Work ; Report of the Industrial Commission, 
XIX, 723-956; Schloss, Methods of Industrial Remunera- 
tion ; Webb, Industrial Democracy. 



CHAPTER XIV 

PROJECTS FOR ECONOMIC REFORM 
I. The Single Tax 

§ 221. At various times it has been proposed to alter 
radically the present distribution of wealth, and .at present 
Land nation- tw0 projects enlist more or less public interest, 
aiizatum. foe single tax and socialism. About 1870 
a movement was started in England in favor of land nation- 
alization. An organization known as the Land Tenure 
Reform Association, of which John Stuart Mill became 
the president, proposed that the state should take, by 
taxation, the future increase of land rentals, and that 
present owners should be given the option of "relinquish- 
ing their property to the state, at the market value which 
it might have acquired at the time when the project should 
be adopted by Parliament." The Association claimed 
that its plan was both just and desirable because the 
growth of ground rent (economic rent in the strict sense) 
is due to the progress of society in population and wealth, 
and not to "any effort or outlay by the proprietors." 

§ 222. Some years later Mr. Henry George, in a work 

which gained a large number of readers, urged that the 

The single state should not only take by taxation the 

future increase of land rent, but should seize 

gradually the present economic rent of land, or at least 

324 



THE SINGLE TAX 325 

so much of it as should be needed to defray all public 
expenditures conceived upon a somewhat elaborate scale. 
His purpose would be accomplished by abolishing all 
other taxes, and imposing on land a single tax equal sub- 
stantially to its economic rent, or such a proportion of 
it as might be required. He denied, moreover, the justice 
or necessity of compensating landowners for the losses 
occasioned in the execution of the plan, so that in scope 
and in method of operation his proposals were far more 
radical than those of the Land Tenure Reform Association, 
which had commanded the support of such an eminent 
economist as Mill. 

Mr. George, in expounding this scheme, argued vigor- 
ously that all men should have absolute rights of pos- 
session over the products of their labor and M r. George's 
capital, even denying the justice of a cax that ar « uments - 
falls upon anything that a person has produced. He urged, 
however, that rent is not the product of any man's labor, 
but the result of social growth and activity by which the 
demands upon land are increased and its value enhanced. 
Since the community, in this view, creates rents, it should 
reserve them for public uses, and not allow them to be 
diverted into the pockets of private individuals. Mr. 
George attributed poverty and other social ills to the fact 
that landowners, contributing nothing to the product 
of industry, are allowed to claim, as society advances, 
an increased share of the proceeds. 1 He looked upon 

1 Mr. George's statement of the case was as follows : " The reason why, 
in spite of the increase of productive power, wages constantly tend to a 
minimum which will give but a bare living, is that, with increase in pro* 
ductive power, rent tends to even greater increase, thus producing a cor* 



326 PROJECTS FOR ECONOMIC REFORM 

the single tax as the panacea for all evils that can in any 
way be removed by social action, and denounced private 
ownership of land as robbery. Written with great power 
and even eloquence, his writings have gained for him a 
considerable number of disciples. 

§ 223. Passing over the metaphysics of the question, 

it is tolerably evident, first of all, that there is a hiatus 

between the proposition that rent is an unearned 

Criticism. . i i 1 r • • 

income, and the proposal to confiscate existing 
rents. Rent is not the only unearned income; inherit- 
ances, gifts, and some speculative gains are obtained 
without exertion on the part of the recipient. The right 
of private property, therefore, does not depend for its 
justification merely upon the fact that the objects owned 
are the products of the owner's labor; it depends at all 
times upon considerations of social expediency, and upon 
such grounds private ownership of land has been con- 
sidered by most people to be justifiable. If the belief 
in the good effects of private ownership is a mistake, 
it would follow that society would do well to correct the 
error; but it would not follow that the whole burden of 
the change should be thrown upon those persons who, 
in entire good faith and in accordance with the will of 
the community as expressed in law, had invested their 
fortunes in land. Appropriating existing land values 

stant tendency to the forcing down of wages." — Progress and Poverty, 
Bk. V, Chap. 2. By the " forcing down of wages," Mr. George means 
either an actual decrease, or a failure of wages to increase as rent in- 
creases, i.e., a relative decrease. 

1 It is not true in all senses of the term that rents are invariably un- 
earned incomes, as we have seen (§ 196). That there is a very large 
unearned increment, however, especially in cities, is conceded to Mr. George. 



THE SINGLE TAX 327 

without compensation is not to be thought of, even though 
the rest of Mr. George's arguments commanded our 
assent. 

But it is clear that Mr. George exaggerated the evils 
that follow private ownership of land, and overlooked 
entirely the benefits which have resulted from Further 
it. If we concede, as we must, that the usual criticism - 
effect of progress is to increase the value of the land, it 
does not follow necessarily that the proportionate share 
of the landlord in the product of industry increases. The 
landlord receives a higher rent for his land, but the prod- 
uct obtained from it may have increased in equal, or even 
greater, proportion, so that the share of the total product 
received by the landlord may be no larger than before. 
Until it can be shown that rent not only increases, but 
increases more rapidly than the product of industry, it 
cannot be demonstrated that the growth of the land- 
owner's income is the cause qf poverty. As a mattei 
of fact, for a generation or more, wages have been steadily 
advancing in the United States and other progressive 
countries at the same time that rents have increased. 

Then, too, it should never be overlooked that, whatever 
evils may have resulted from it, private property in land 
has furnished the great stimulus for the devel- Advantages 
opment of the natural resources of the United i a ndowner- 
States. The rise in land values following ship - 
the establishment of each new settlement has lured hosts 
of people into the wilderness, and has been a not inappro- 
priate reward for the hardships of pioneer days. In 
addition to this fact, when land ownership is widely 
distributed, as in this country, the increment of value 



328 PROJECTS FOR ECONOMIC REFORM 

that results from social progress is sure to be widely 
distributed. Moreover, the desire to secure a small farm 
or a site for a house has been the principal incentive to 
industry and thrift for millions of people ; and the acquisi- 
tion of a little land has not only started many families 
on the road to a competency, but also created a vast body 
of prosperous, conservative, and law-abiding citizens. 

§ 224. From a practical point of view, great difficul- 
ties would be encountered in the effort to apply the single 
tax to agricultural land. After a farm has 

Agricultural ° . 

and urban been under cultivation for many years, it is 
extremely difficult to determine what part of 
the so-called rent which it yields is the mere value of the 
site, and what represents the interest on capital expended 
in improvements. Barns and fences can without difficulty 
be valued separately ; but labor sunk in clearing, ditching, 
removing stones, and fertilizing defies accurate computa- 
tion. The best that could be done would be to apply 
some sort of rough estimate which would, in numberless 
cases, do great injustice to landowners or impair seri- 
ously the revenue received by the government. In cities, 
of course, this difficulty would not arise, since it is possi- 
ble to place separate valuations upon building lots and 
improvements, as is done to-day by the assessors in 
Boston and New York. 

§ 225. If the proposal to confiscate existing rents must 

be rejected as unjust, the same criticism cannot be directed 

at projects for gradually appropriating to 

increment of public purposes the future increment of land 

values. The only question involved here is 

the desirability and practicability of such a change in 



THE SINGLE TAX 329 

the policy of the government. The practical difficulties 
in the way of separate valuation of land and improve- 
ments are, for the present at least, a decisive objection 
to the application of the scheme to agricultural holdings. 
With urban land this difficulty disappears; while here 
the amount of the future increment, and consequently 
the importance of the proposal, are decidedly greater. 
To buy out present owners, at such values as munici- 
palities are obliged to pay for land taken for city pur- 
poses, would involve communities with a stationary or 
slowly increasing population in a hazardous speculation, 
even though a city that was growing with great rapidity 
might safely undertake such a venture. But to adjust 
municipal taxation in such a manner as to intercept a 
considerable part * of the future unearned increment from 
land would be a safe and probably a desirable policy. 
This would place a part of the increasing burden of city 
taxation upon an object that derives its value from munici- 
pal growth, and not from individual effort; it would do 
no injustice to present owners; and would make it pos- 
sible in growing communities to reduce the pressure of 
taxes upon business enterprises. It would, moreover, be 
in line with some of the existing tendencies in municipal 
finance. 

§ 226. In passing judgment upon Mr. George's pro- 

1 The whole of the future increase of rentals could not be taken with- 
out injustice to present proprietors. The purchase price paid for land in 
a progressive city is somewhat greater than its capitalized present rental 
value, since the purchaser can and must pay more in view of the prospec- 
tive increase of the rent. Some part of the future increase, therefore, is 
reflected in present capital values, and should be left to the present 
owners. 



330 PROJECTS FOR ECONOMIC REFORM 

posals, we have been unable to accept the dark picture 

which he has drawn of the results of private property in 

land, and we are obliged, under any circum- 

Conclusion. f ' . 

stances, to reject the idea of taking existing 
land values without compensation. It does appear, 
however, that both Mr. George and the English Land 
Tenure Reform Association have pointed to a highly 
eligible object for special taxation. When it is conceded 
that the past increment of land values is beyond the reach 
of any just exercise of the taxing power, the question 
remains : What policy should be pursued with reference 
to the future increase of ground rent? So far as urban 
lands are concerned, there can be little doubt that it is 
the part of wisdom for municipalities to seize upon a 
source of revenue that is brought into existence by urban 
growth and to a large extent maintained by constant 
public expenditure. 

II. Socialism 

§ 227. More radical than the single taxer in his criti- 
cism of the existing distribution of wealth, the socialist 
socialism holds that interest and profit, as well as rent, 
defined. are unearnec j incomes unjustly extorted from 

the persons whose labor creates all the wealth that is 
brought into existence. Socialism, therefore, contem- 
plates such a reorganization of economic society as shall 
bring all the instruments of production, capital as well as 
land, under collective ownership ; replace private enter- 
prise by public management of all important industries; 
effect a just distribution of the social income; and per- 
mit private ownership of the consumer's goods dealt out 



SOCIALISM 331 

to each worker. Its elements may be briefly stated as 
common ownership of land and productive capital; pub- 
lic organization and management of at least all staple 
industries ; the distribution of wealth by public authority, 
in accordance with some principle regarded as just ; and 
private property in the incomes allotted to individuals. 

§ 228. Socialism is not a new but a very old theory 
which has appeared and reappeared in one form or another 
ever since the time of Plato. It has usually _ _ ^ 

J Its history. 

attracted most interest at times when a sharp 
separation of rich and poor has brought to general atten- 
tion the unequal distribution of wealth and the problem 
of poverty ; although ideals of social or political equality, 
such as appealed to so many persons in the eighteenth 
century, have been another source of socialistic theories. 
Plato's " Republic," for instance, with its proposals for 
the extremest subordination of individual life to the con- 
trol of the state, has for its background a bitter and pro- 
longed contest between rich and poor which had long been 
waged in Athens and other Greek cities. Again, in the 
sixteenth and seventeenth centuries, the social distress 
occasioned by widespread economic and political changes 
evoked such works as Sir Thomas More's "Utopia" and 
Campanella's "City of the Sun"; and in the eighteenth, 
the misery that existed in France made that country a 
fruitful field for socialistic speculations. Finally, in the 
nineteenth century, the increased importance of capital and 
the sharper separation of the employing and the laboring 
classes have prepared the ground, already sown with 
democratic political ideaK for the growth of modern 
socialism. 



332 PROJECTS FOR ECONOMIC REFORM 

§ 229. Socialism of the present day is a contemplated 

scheme of industrial organization based upon an analysis of 

the workings of modern industrial society. The 

The basis of ° .,.,.. 

modern so- central fact in the present industrial society is 
said to be capitalistic production, by which is 
meant production carried on with the aid of so much capital 
as has come into use since the Industrial Revolution. Capi- 
talistic production, the socialist holds, has divided society 
into two classes, those who own land or capital and those 
who do not, the latter being dependent upon the former 
for an opportunity to employ their labor. Between capi- 
talist and laborer, consequently, there has arisen a class 
struggle, in which the owner of capital exploits the labor 
of the hired workman to his own advantage ; while the 
workman, oppressed with long hours of toil and low wages, 
endeavors vainly to improve his position so long as the 
existing system continues. The political and industrial 
history of the nineteenth century, it is alleged, is nothing 
but a record of the various phases which the warfare 
between the capitalists and the laborers has assumed; 
while the only clew to the development of the twentieth 
is to be gained from a study of the probable tendencies of 
this class conflict. 

The machinery by which the capitalist succeeds in ex- 
ploiting the laborer is the wages system. Socialists hold 
that the entire product of industry is to be attrib- 

Alleged ex- c .,.,., 

pioitation of uted to labor, and that capital is nothing but a 
certain amount of labor embodied in a tool or 
machine. But under the wages system the laborer does not 
receive all that he produces, because the employer manages 
to withhold a part as compensation for the use of his 



SOCIALISM 333 

capital. 1 The result is that, whereas a laborer by working 
three or four hours could produce all the wages that he 
actually receives, the employer keeps him at work for 
nine or ten hours and appropriates, under the name of 
rent, interest, or profits, the surplus product of the addi- 
tional time. Such a contract, though disadvantageous 
to the laborer, is forced upon him, the socialist declares, 
by his poverty and inability to hold out for better terms. 
If it ever happens that favorable circumstances enable a 
laborer to secure a wage that will somewhat more than 
cover the bare living expenses of himself and family, the 
growth of population speedily forces the rate down again 
to the minimum required for mere existence, so that 
in fact, by an iron law, the wages system dooms the laborer 
to an unsatisfactory and precarious position. 

The only salvation for the laborer, according to the 
socialist, is to acquire political power and to take posses- 
sion of the instruments of production by which T he remedy 
he is now "enslaved." Through the estab- propose<L 
lishment of what is called the cooperative commonwealth, 
the workers can secure access to land and capital without 
paying tribute to landlord or capitalists ; and socialists are 
now addressing themselves actively to the work of stirring 
up class feeling among laborers and impressing upon them 
the necessity for independent political action. In Germany, 
where the movement has made the most progress, no less 
than 3,000,000 votes were cast at the election of 1903 for 
socialist members of the Reichstag ; while in Belgium, 

1 That is, he withholds something in excess of what is needed to replace 
the labor expended in producing the capital consumed in production. To 
the mere replacement of capital he is, of course, entitled. 



334 PROJECTS FOR ECONOMIC REFORM 

France, Italy, and the United States the adherents of 
socialist parties are now numbered by the hundreds of 
thousands. 

§ 230. Present-day socialists, while proclaiming the ne- 
cessity for independent political 'action by laborers, believe 
The alleged that their cooperative commonwealth must, in 
towardTo- an y event, be established ultimately by the 
ciaiism. mere operation of economic forces — the forces 

of capitalism itself. The advantages of large-scale pro- 
duction are said to be aggregating capital in larger and 
larger masses, the big capitalist swallowing scores of his 
smaller competitors; until at last, through the formation 
of trusts, a development- has begun which is to destroy 
competition in practically all parts of the field of industry. 
The result of the present tendency toward concentration 
is to be the ultimate control of all industry by a small 
body of capitalists, whose success will, on the one hand, 
prove the practicability of organizing business enterprises 
on a national scale, and, on the other, make the continu- 
ance of private ownership impossible. The trust, there- 
fore, is welcomed as an important factor in bringing about 
the establishment of socialism, since it is believed to dem- 
onstrate the practicability of the scheme and to produce 
an amount of discontent that will finally lead to the nation- 
alization of industry. 

§ 231. Socialism is believed to be a desirable thing for 

the laboring classes since its object would be to give them 

the shares that now accrue to the owners of 

Supposed ad- 
vantages of land and capital. But beyond this, it is alleged 

socialism. . . . r . , 

that the cooperative organization 01 industry 
would be advantageous because it would avoid the waste 



SOCIALISM 335 

occasioned by competition. Production as now organized 
is criticised as planless, since producers often make mis- 
takes or work at cross purposes; whereas a nationalized 
industry can be managed on comprehensive general plans, 
with a minimum of wasted effort. Needless expenses, it 
is said, are now incurred in advertising and in competing 
for business, all of which socialism would render unneces- 
sary. Moreover, with land and capital in private owner- 
ship, a considerable number of persons are living upon 
fixed incomes and producing nothing, who would, under 
the new regime, be obliged to work or to starve. By avoid- 
ing waste, inaugurating comprehensive plans, and oblig- 
ing every one to work, it is claimed that socialism would 
make the production of wealth so large that all workers 
would be assured incomes adequate for the satisfaction 
of every rational want, even with a far shorter working 
day than prevails at present. From the standpoint of 
production, therefore, as well as from that of distribution, 
socialism is regarded as the ideal method of economic 
organization. 

§ 232. In criticism of current socialist theories we may 
begin conveniently with the idea of an alleged irrepressible 
class conflict arising from the systematic ex- criticism of 
ploitation of the laborer. That there is a socialism - 
conflict of interests when employers and employees come 
to divide the product of industry among themselves, can- 
not be denied, because the more one party receives, the 
less remains for the other; but that a fair division is not 
and cannot be effected under the wages system, is a very 
different proposition. The socialist alleges that the divi- 
sion is always unfair because the capitalist, producing 



336 PROJECTS FOR ECONOMIC REFORM 

nothing, withholds from the workman a part of the prod- 
uct of his labor. The argument rests upon the idea that 
labor, and nothing but labor, contributes to the produc- 
tion of a commodity; and that the value of a product 
depends solely upon the amount of labor required for its 
production. A more absurd theory can hardly be found 
in the history of economic speculation. The value of a 
product does not depend solely upon its cost of production ; 
although that is the factor which controls the supply and, 
therefore, jointly with the marginal utility, determines the 
value. Furthermore the cost of production includes 
something more than mere labor, because abstinence, or 
waiting, is just as real and necessary a part of the sacrifices 
incurred by producers as the physical energy expended by 
the workman. The illustration given in another place 
(§ 64) should have made this point tolerably clear. 1 

When due account is taken of the sacrifice represented 
by abstinence, or waiting, and of the risks which the en- 
trepreneur assumes when he establishes an independent 

1 Another illustration may be taken from the same acute writer, Boehm- 
Bawerk, from whom we have drawn the one given in § 64. A cask of new 
wine sells for $30, and the socialist would regard all of this sum as a value 
created by labor alone. A capitalist buys this cask and sets it aside for 
twenty years, the wine, meanwhile, improving with age until, at the expira- 
tion of the period, it sells for $100. Upon the theory of the socialist, it is 
impossible to explain how the difference of $70 was added to the value of 
the wine, since no labor has been expended from the day that this cask 
was placed in the cellar in order that it might age. The socialist, too, 
denies that any sacrifice is called for on the part of the man who invested 
$30 in such a way that nothing was secured from it for twenty years. His 
theory, in fact, is that the wine merchant robs the men who originally 
produced the wine and were paid all that new wine was worth, unless he 
turns over to them the $70 added to the value of the wine after it has aged 
for twenty years. 



SOCIALISM 337 

enterprise, it becomes clear enough that the laborer is 
not necessarily robbed when the capitalist and the em- 
ployer receive their profits. This is not to say The wages 
that, as a matter of fact, injustice is never done system - 
to the laborer ; but simply that no wrong is necessarily done 
him by the action of the employer in withholding a part 
of the product. There is no iron law that holds wages 
down inevitably to a bare physical subsistence, as is proven 
by the fact that the remuneration of labor has steadily 
increased for half a century or more, and that the standard 
of living of the laboring classes has repeatedly advanced. 
If any class of workmen is so improvident that its members 
are willing to rear large families which they cannot support 
in a decent manner, the wages of that grade of labor will be 
low on account of the inordinate increase of the supply of 
laborers. If, however, laborers are intelligent and pru- 
dent enough to insist upon a comfortable standard of 
living, they can keep their wages far above the minimum 
necessary for the mere maintenance of life. If, in addi- 
tion, they are offered educational facilities and are free 
to combine for lawful ends, the working classes are able 
to maintain tenaciously existing rates of wages, and, at 
each favorable opportunity, secure an increase. This is 
so clear that many socialists no longer contend that the 
wages system dooms the laborer to a life of constant or 
increasing misery; and merely argue that, even though 
wages have risen, the worker is robbed simply by reason 
of the fact that the capitalist receives any part of the prod- 
uct of industry. In fact, they now argue, in some cases, 
that socialism never really taught the theory of the pro- 
gressive impoverishment of the laboring classes. 



338 PROJECTS FOR ECONOMIC REFORM 

§ 233. When one examines the arguments which are 
believed to prove the existence of an irresistible tendency 
„.„... . toward socialism, it appears that most of them 

Criticism of ' rx 

the alleged turn upon the phenomena of large-scale produc- 

tendency . \_ ' f, ° ,. . . 

toward so- tion. In the field of natural monopolies, it is 
clear that combination is the only result to be ex- 
pected ; and that its growth inevitably brings us to the two 
alternatives of public ownership or public regulation, because 
unregulated private monopoly does produce discontent, 
as the socialists aver. But even if we concede that public 
regulation of private monopolies is sure to prove unsatis- 
factory, and that public ownership is to be the policy finally 
adopted, this still leaves the great fields of agriculture, 
manufactures, and commerce open to private enterprise. 
In the industries last mentioned the socialist thinks that 
the trust movement will result finally in the establishment 
of the regime of monopoly ; but, as has been argued in an 
earlier chapter (§ 129), there are the best of reasons for 
rejecting such a conclusion. The force of competition 
will finally prove, outside of industries that are natural 
monopolies or depend upon natural monopolies, too 
strong for the calculations of both the trust promoter and 
the socialist. It seems logical ' and attractive — when 
small industries are seen to be gradually replaced by large, 
while large enterprises often combine into trusts — to 
affirm that there exists here a natural and inevitable law 
of development by which production is organized first in 
small establishments, then in large, and finally in estab- 
lishments of the largest possible size ■ — monopolies ; but 
the facts of industrial growth are not, and never have been, 
so easily and logically explained. In some cases, as in the 



SOCIALISM 339 

natural monopolies, the course of economic evolution is 
as the socialist alleges ; but elsewhere opposing tendencies 
appear, and the outcome is different. The theory of the 
socialist does violence to the facts by endeavoring to ac- 
commodate them to a single procrustean formula. 

Socialists draw a severe indictment against the present 
methods of organizing productive industry, and criticise 
them as irrational, planless, and wasteful. That 

1 \ The present 

there is some force in the arguments no one can economic 
deny, since at many points business is not con- 
ducted as efficiently as could be desired. Many of the 
defects in the present system, however, can be remedied ; 
and, in fact, are continually being eradicated. The col- 
lection of statistics of production and consumption, for 
instance, and the careful study of markets are now pro- 
ceeding upon a scale never before known, and further 
helpful developments in the same line are certain to occur. 
Competition, in all probability, will always entail some 
waste; but this is not an argument in favor of socialism, 
since that system would present still greater weaknesses. 
§ 234. Under a socialistic regime the government, 
however it might then be constituted, would have to organ- 
ize and conduct the great staple industries upon weakness of 
a national scale. This work would involve sociahsm - 
all the waste and possibilities of corruption that so often 
attend governmental enterprise; while there is every 
reason to believe that the administration of affairs would 
be, taken by and large, less progressive, energetic, and 
efficient than at present. Doubtless the methods of public 
administration can be improved, and perhaps they might 
be as its functions increased; but no one who has ever 



340 PROJECTS FOR ECONOMIC REFORM 

had opportunity to compare the leisurely methods of 
the average government office with the conditions that 
prevail in the average private establishment will believe 
that, under socialism, productive industry would be 
managed as efficiently as at present. 

A further difficulty would be encountered when a social- 
istic government should undertake to apportion the labor 
Apportion- ^ orce °^ ^e country among the various occu- 
ment of labor pations. Some callings are more pleasant or 
highly esteemed, and would be sought for much 
more eagerly than others. All competitors for preferment 
could not, obviously, reach the goal of their desire; and 
there would continue to be shattered hopes and disap- 
pointed ambitions, as at present. Our existing system, by 
a more or less impersonal method, succeeds fairly well 
in eliminating the inefficient, and securing the services 
of the most efficient in the highest positions. . Favoritism 
and nepotism are far from unknown in industry, but they 
exist there to no such extent as in government service, 
since the inevitable penalty for them is business failure. 
Envy and discontent would continue to exist under social- 
ism. They would be stronger, in fact, since disappointed 
competitors would witness so many cases in which advance- 
ment was secured through favoritism or corruption. One 
who watches the multitude of toilers that pours into a 
great city each morning and distributes itself through the 
factories, workshops, stores, and other establishments 
awaiting its coming, may well feel thankful that the 
hurrying throng is not seeking positions that are distrib- 
uted by the political party that happens to command a 
majority of its votes. 



SOCIALISM 341 

Most serious of all is the fact that, with production or- 
ganized upon a socialistic basis, the very nerve of efficient 
industrial effort would be cut, at least for the 

Socialism and 

majority of workers. At present we offer pecun- industrial 
iarygain as a reward of efficiency; and, from the 
lowest grade of labor to the highest, we apportion a remu- 
neration that depends upon the value of a person's services. 
The love for gain is not the highest motive, but it is better 
than none; and it seems to be the one that appeals most 
strongly to the average man. Socialists urge that, under 
their system, the desire for social esteem would keep men 
at work, just as patriotism and other unselfish motives 
sometimes operate to-day. But what we want is not 
merely that public opinion or some other force shall keep 
men at work, but that people shall exert themselves as 
strenuously as they do at present under the inducement of 
personal gain. The picture of a society in which higher 
motives rule, and the welfare of all is the rule of action for 
each, presents undoubted attractions ; but we have no ex- 
perience with human nature which justifies the hope that 
it will speedily be realized. 

Considered as a scheme of distribution, socialism pre- 
sents almost as grave difficulties as it offers when viewed as 
a plan for organizing production. Socialists - ._ . 

r & & r ... Difficultiee in 

have always clamored for a just distribution socialistic 
of the product of industry, but have not always 
agreed as to what constitutes distributive justice. At 
present, however, they generally incline to the view that 
equality of income would be the fairest possible principle ; 
and therefore earlier schemes for distribution according 
to needs or merit will not detain us. In any case, it is 



342 PROJECTS FOR ECONOMIC REFORM 

probable that equality would be the only practicable plan, 
on account of the difficulties that would follow if a govern- 
ment dependent upon popular suffrage should undertake 
to apportion wealth in any other way. Now equality of 
remuneration overlooks the varying needs and deserts of the 
recipients ; and no one but the confirmed socialist can be 
impressed with the equity of awarding the same compensa- 
tion to unequal industry, talent, and skill. Moreover, such 
a method of distribution would be likely to remove that 
stimulus to invention and enterprise to which we owe so 
much of our present economic progress. 

Socialism, therefore, has fatal weaknesses whether con- 
sidered as a scheme for the production or for the distribution 
of wealth. It may be suggested, furthermore, 

Socialism J t i_i j r 

dangerous to that the system would probably endanger iree- 
dom of thought and action if it should ever 
be carried into effect. With all branches of production 
in the hands of the government, it would be dangerous 
for any one to criticise the policy of the public authorities. 
At present people can find in private business a vantage 
ground from which they can safely criticise men and 
measures; but under socialism they would have no more 
freedom than officeholders now enjoy, in the United States 
or elsewhere. Socialists are no more tolerant of opposi- 
tion, or even of differences of opinion within their own 
ranks, than other people, as the lively proceedings of their 
national and international conferences testify; and it 
would probably go hard with the luckless officeholder 
who should undertake serious criticism of the policy of 
an administration composed of enthusiastic advocates of 
a cooperative commonwealth. It is very doubtful, in- 






SOCIALISM 343 

deed, if a socialistic government would furnish the print- 
ing presses, paper, postal facilities, and public halls that 
would be needed for free speech and open discussion hostile 
to itself; and without these things, it would be impossible 
to rally an opposition party. 

§ 235. Few people, if any, would care to assert that 
existing methods of production are perfect or that the 
present scheme of distribution always secures 

1 Conclusion. 

exact justice. But this much can be affirmed : 
private enterprise has been able to increase in a marked 
manner the production of wealth, and holds out a pros- 
pect of continued improvement; the present distribution 
of wealth has subserved fairly well the highest interests of 
our civilization, while the laborers, who make up the most 
numerous social class, have been able to improve con- 
stantly their position. Moreover, our present system 
secures reasonable opportunity for criticism and freedom 
for experimentation, so that it is possible to try to improve 
any features that are shown to be unsatisfactory. Rational 
criticism, enlightened public opinion, and resolute self- 
reliance in overcoming economic difficulties seem to offer 
the most practicable method of reforming and reshaping 
existing institutions. In some directions reform may 
best be secured by extending the activity of government; 
such cases can be dealt with as they arise. But, taking 
men as they are, and not as we would like to have them, 
it will probably be necessary, for an indefinite time to 
come, to appeal to the motive of personal gain in order 
to secure the best results in most branches of productive 
industry. Socialism, in fact, would probably cut the 
very nerve of industrial efficiency. 



344 PROJECTS FOR ECONOMIC REFORM 

FOR SUPPLEMENTARY STUDY 

The Single Tax : George, Progress and Poverty ; Hadley, Eco- 
nomics, 470-474; Seager, Introduction to Economics, 517— 
525; Shearman, Natural Taxation; Seligman, Essays in 
Taxation, 64-94. 

Socialism : Bullock, Selected Readings in Economics, 668-705 ; 
Ely, Socialism and Social Reform ; Ensor, Modern Socialism ; 
Menger, The Right to the Whole Produce of Labor ; Schaffle, 
Quintessence of Socialism; Spargo, Socialism; Taussig, 
Principles of Economics, II. 443-478; Vandervelde, Collec- 
tivism. 



CHAPTER XV 

GOVERNMENTAL REVENUES 
I. The Various Branches of Revenue 

§ 236. In performing their various functions govern- 
ments have need of ample revenues, which must be drawn 
from the incomes of their citizens. Apart Public rev . 
from loans, which are but a temporary form enue * 
of income, five main branches of public revenue may be 
enumerated. 

§ 237. The first class comprises revenues drawn from 
domains and public industries. Domains are lands 
owned by the government, and are often of (l) From do- 
considerable financial importance in European mains - 
states. The United States, however, which has had a 
magnificent western domain, has followed a different 
policy. Believing that the resources of the country would 
be developed most rapidly by allowing the public lands 
to pass into private ownership, the federal government 
has disposed of its holdings as fast as possible, so that 
to-day receipts from land sales form but an insignificant 
item in the national revenues. . 

Governments conduct many kinds of public industries, 
such as waterworks, gas and electric lighting plants, 
railways, and postal and telegraph systems. And public 
Sometimes these enterprises are operated at industnes - 
a loss, as is the case with the postal service of the 

345 



346 .GOVERNMENTAL REVENUES 

United States, in which the annual deficit has ranged 
in recent years from $2,000,000 to $10,000,000. Not in- 
frequently a profit is derived from public industries; 
Prussia, for instance, draws a large net revenue from her 
railroads, while England, France, and Germany realize 
substantial sums from the post office. In general, how- 
ever, financial considerations are not the chief reason for 
bringing these enterprises under public management. 
The purpose has been rather to avoid the evils of monop- 
oly, to extend the service more widely than private com- 
panies could do, or to husband natural resources such as 
forests. 

§ 238. Fees constitute a second form of public revenue. 

They are charges which governments make for services 

performed mainly in the public interest but 

(2) Fromfees. r f 111 r 

conferring a distinct, measurable benefit upon 
the payer. Probate fees, court charges, fees for recording 
mortgages and deeds, and for marriage licenses are com- 
mon examples of this sort of revenue. 

§ 239. A third branch of revenue comprises receipts of 

a very miscellaneous character. Fines and penalties form 

a small item of income. Sometimes property 

(3) From mis- r r J 

ceiianeous reverts to the government upon the failure of 

sources. . . 

heirs. In a number of countries public lotteries 
are still maintained, and yield considerable income. 
Finally, governments are occasionally the recipients of 
gifts, which, however, are usually for some specific purpose, 
as a park, a library, or a schoolhouse, and do not form a 
part of the general public revenues. 

§ 240. A fourth form of revenue has become very im- 
portant in the finances of American municipalities, but 



THE VARIOUS BRANCHES OF REVENUE 34/ 

has been less often utilized in other countries. This is the 
special assessment, which may be defined as "a compul- 
sory contribution, levied in proportion to the 

J . r r (4) From spe- 

special benefits derived, to defray the cost of a ciai assess- 
specific improvement to property, undertaken in 
the public interest." When new streets are opened or old 
ones are paved, when drains and sewers are constructed 
or when public squares or parks are laid out, the owners 
of adjoining real estate, which is enhanced in value as a 
result of such improvements, may justly be called upon to 
pay a part or even the whole of the cost of such public 
works. The entire community may be interested in such 
improvements; and, accordingly, it commonly defrays a 
part of the expense out of its general revenues. But the 
owners of abutting real estate derive a special, measurable 
benefit from such public works, and should in justice 
bear a part of the burden thus incurred. Special assess- 
ments have become an important and probably a per- 
manent feature of American municipal finance, since they 
have proved well adapted to the needs of young and rapidly 
growing cities. 

§ 241. Taxes constitute the final, and under modern 
conditions the most important, branch of public revenue. 
They may be defined as compulsory contribu- (5) From 
tions exacted by governments from persons taxes " 
within their jurisdiction for the purpose of defraying 
general public expenses. They differ from fees or special 
assessments in that they are not charges for special, 
measurable advantages or services which the payer has 
received from the government. The actions of the govern- 
ment in protecting persons and property, or in ministering 



348 GOVERNMENTAL REVENUES 

to the general welfare in other ways, do not confer upon 
particular citizens distinct and measurable benefits; they 
are of the highest importance to all, but they bestow com- 
mon benefits upon the whole body of citizens, so that it is 
impossible to estimate the precise advantages that accrue 
to individuals. For this reason all persons within the juris- 
diction of the government may be called upon to contribute 
to its support, and taxes are properly defined as compulsory 
contributions designed to meet the general public expenses. 
§ 242. If taxes are honestly and wisely expended, the 
people receive a large return for the sums contributed for the 

support of the government. But it should always 
fund"de- be remembered that a tax is a deduction from 

the wealth of the community and a burden upon 
the taxpayers. In a New England town meeting the truth 
of this statement is keenly realized whenever public ex- 
penditures are authorized. But when the operations of 
government are farther removed from the scrutiny of the 
people, and revenues are raised by customs and excise 
duties which are concealed in the prices of commodities, 
or by corporation and inheritance taxes which are less 
felt by the mass of the citizens, there is danger that this 
fact may be overlooked. From 1885 to 1890 the federal 
government annually collected surplus revenue that 
amounted to even more than $100,000,000, and the evils 
of such a condition were not clearly recognized by the 
people. The thoughtful student hardly needs to be told 
that taxation can furnish the government with no "magic 
fund," out of which lavish expenditures can be made 
without cost to anybody. Yet it sometimes appears that 
this delusion is more commonly entertained than it is 



THE VARIOUS BRANCHES OF REVENUE 349 

pleasant to contemplate. The only result of popular 
error upon this point must be extravagance and corrup- 
tion in the management of public expenditures.- 

§ 243. The just distribution of the burden of taxation 
is a topic that occupies much space in treatises upon public 
finance, but it cannot be said that anything T 

' ■ J ° Just distn- 

like a final conclusion has been reached upon tutionof 
the subject. Adam Smith's famous maxim that 
the " subjects of every state ought to contribute toward 
the support of the government as nearly as possible in 
proportion to their respective abilities " has gained wide 
acceptance; but it has not been so easy to agree as to 
what constitutes ability, and how it shall be measured. 
The general theoretical problems involved in the question 
could not, in any case, receive adequate treatment in the 
space at our command, and must of necessity be set aside. 
Something may be said, however, concerning the various 
things which have been proposed as tests or criteria of the 
taxpayer's ability to bear public burdens. 

Consumption or personal expenditure is the poorest of 
all measures of ability, since persons with large incomes 
do not consume proportionately more than those „ . 

r r J Various 

of moderate or small means ; while people who measures of 

.,. ., , ability. 

must support large families necessarily expend 
more than persons of the same income who are differently 
situated. Taxation of articles of common consumption 
is, therefore, a method of taxing people's necessities 
rather than their ability. A second criterion has been 
found in the property which each person owns. This is 
certainly preferable to expenditure, but is very far from 
perfect. All property is not equally productive; and 



350 GOVERNMENTAL REVENUES 

some may be either wholly unproductive or a positive 
burden upon the owner, who may, for instance, be "land 
poor." Then, too, many persons who have accumulated 
but little property receive wages or salaries for their labor, 
and are able to contribute something to the support of the 
government even though they are not property holders. 
Finally, income has been considered the true measure of 
ability, and, without doubt, it is superior to either of the 
other criteria. But income is not an unexceptionable 
measure, since it is not always a perfect test of ability. In 
the first place, an income derived wholly from personal 
exertions does not indicate the same ability that an equal 
revenue drawn from invested property represents. The 
former terminates the moment that the power to labor 
ceases, so that a considerable part of it must be saved in 
order to provide for the future ; while the recipient of the 
latter may spend his entire income without depriving him- 
self of the means of future support. And, in the second 
place, ability to bear public burdens varies with the de- 
mands made upon each person's resources. Two incomes, 
for instance, may be equal; but the recipient of one may 
be a single man, while the recipient of the other has an 
expensive family to support. In such a case it is evident 
that equal incomes do not indicate equal ability to con- 
tribute to the government. 

Yet even though no perfect measure of ability is attain- 
able, it is not impossible to secure approximate justice in 
The practical apportioning the burden of taxation. Income 
outcome. ma y ^ mac j e ^g c hief test of the taxpayer's 
ability, and something can be done to correct the inequal- 
ities that result in certain cases from the adoption of such 



THE VARIOUS BRANCHES OF REVENUE 351 

a standard. Funded incomes, for instance, can be taxed 
more heavily than those derived from personal exertions 
— a thing that can be accomplished by levying taxes upon 
property as well as upon income. Furthermore a certain 
minimum sum may be exempted from the operation of 
taxes that are levied directly upon revenue, and a rough 
allowance can in this way be made for the demands which 
the maintenance of a family makes upon the possessors of 
small incomes. 

§ 244. Associated with the problem of justice in taxation 
is the question whether the tax rate should be proportional 
or progressive. A tax is proportional when it proportional, 
imposes a fixed rate, say two per cent of the an?progres- 
value of all objects assessed, irrespective of sivetaxation - 
the total amount of the property or income of each tax- 
payer. Taxes are regressive when the rate increases as 
the amount of property or income decreases. Thus a 
fixed business license tax of $20 upon all retail store- 
keepers would be regressive, since the rate of taxation 
would increase as the size of the business decreased. 
Finally, taxes are progressive when the rate increases as 
the taxable property or income increases. Thus a progres- 
sive income tax may impose a rate of one per cent upon 
incomes of $1000 or less, and may levy higher rates upon 
larger incomes. 

The injustice of a regressive tax must be evident to all, 
but there is a difference of opinion concerning the merits 
of proportional and progressive taxation. The Me rits of the 
opponents of a progressive rate denounce it methods - 
loudly as a measure of confiscation ; but it seems probable 
that a progressive tax, if it can be rigidly collected from 



352 GOVERNMENTAL REVENUES 

the larger incomes, corresponds more nearly than a pro- 
portional tax to the demands of justice. This is because, 
as income increases, ability to bear public burdens prob- 
ably increases, at even a more rapid rate. A tax of two 
per cent may mean the sacrifice of articles of decency and 
necessity for a man who must support a family out of an 
income of $500, while a man who enjoys an income of 
$10,000 will feel but slightly the payment of a tax of the 
same rate. More than this, the possession of a large 
income gives a person a great advantage in the acquisition 
of future riches, because it is the first thousand dollars of 
a fortune that is hardest to acquire, since wealth begets 
wealth. Such considerations seem to justify a moderate 
increase of the rate of taxation as fast as the property or 
income increases. But this is true only upon the condi- 
tion that the tax is well administered and rigidly collected. 
Great practical difficulties are encountered at precisely 
this point. In this country proportional taxes upon 
property or income are poorly enforced, and fall with 
undue weight upon persons of small or moderate means. 
Until we have administrative machinery that will enable 
us to reach large fortunes with certainty, progressive 
taxation would probably serve only to increase the in- 
equalities that inhere in our existing tax systems. 1 

II. Federal Taxation in the United States 

§ 245. The federal government has always derived a 
very large part of its revenue from customs duties imposed 

1 In the case of inheritance taxes it may be possible to enforce with 
reasonable certainty a progressive rate, since we have, as will be explained 
later, fairly satisfactory methods of reaching the larger estates. 



FEDERAL TAXATION IN THE UNITED STATES 353 

upon commodities imported into the United States. 
These taxes are practically reserved for its exclusive use by 
that clause of the Constitution which forbids customs 
any state to "lay any imposts or duties on duties - 
imports or exports." They had, in fact, prior to the 
Civil War, furnished nearly the whole of the national 
revenues in times of peace; in i860, with a total income 
of $56,054,000, the customs amounted to $53,187,000. 
Since that period other taxes have been required in order 
to meet the heavy charges occasioned by the war and the 
more lavish scale of general expenditure; but in 1903, 
out of a total revenue of $701,372,000, the customs brought 
in $314,497,000. 

Import duties may be either specific or ad valorem 
(§ 162). The latter are open to the objection that they 
lead to the undervaluation of imports and so 

r •!• r i-i 11 • r Specific and 

facilitate frauds m the collection of revenues, ad valorem 
Specific duties are easier to administer and 
more difficult to evade, but are not free from serious 
objections. Goods of the same general character often 
differ widely in value, and a simple specific duty falls with 
undue weight upon the cheaper grades. 

If customs taxes are to yield a large revenue, they must 
be imposed upon articles of general consumption; and 
the bulk of our receipts has always come from 

1 m J Customs 

a few commodities of this kind. In 1911, for duties are 

<th regressive. 

instance, not less than $52,687,000 was collected 
from sugar and molasses. This was practically a per capita 
tax of nearly sixty cents for every man, woman, and 
child in the United States, since the consumption of sugar 
is almost universal; and it amounted to not less than 



354 GOVERNMENTAL REVENUES 

$3 for every family of five persons. 1 Sugar is an 
extreme case; but, in general, the consumption of the 
goods that yield most of the revenue is not at all propor- 
tionate to the taxpayer's income, so that a customs tariff 
is necessarily a form of regressive taxation. Moreover, 
in so far as duties levied for the purpose of protection tend 
to increase the prices of domestic commodities, they take 
out of the consumer's pocket much more than the govern- 
ment receives. 2 

§ 246. Excise duties are levied upon commodities of 
domestic production. Except for a few years after the 
Excise adoption of the present Constitution, and in 

duties. ^ ^y ar £ jg I2j they were not used by our 

federal government prior to the Civil War. Moreover, 
the freedom of commercial intercourse between the states 
was such that no commonwealth could levy an excise 
without injuring or destroying the industry upon which it 
might fall. But in 1862 and 1864 Congress was obliged 
to establish a formidable system of excise taxes upon 
almost all conceivable articles, by which, in 1866, an 

1 Duties on wool and woolen goods, cotton fabrics, vegetable fibers and 
their products, and iron or steel goods, brought in $95,763,000. These 
goods are widely used, though the imported products are not in such uni- 
versal use as sugar. Such articles as imported liquors, silks, and jewelry, 
the luxuries of the rich or well-to-do, yielded only $38,685,000. Tobacco, 
widely though not universally used, yielded $26,159,000. 

2 In 1903, for instance, the United States collected $16,865,000 from 
imported iron and steel, but the steel trust taxed the country several times 
this amount. In that year, to take the clearest illustration, the imports of 
steel rails were 122,444 tons, upon which, the duty being $7.84, the United 
States collected less than a million dollars. But upon the 2,924,956 
tons of rails made and consumed at home, our people paid a tribute of 
$7 or $8 a ton to the steel rail pool which added about the amount of the 
duty to the price charged domestic consumers. 



FEDERAL TAXATION IN THE UNITED STATES 355 

internal revenue of not less than $190,000,000 was obtained. 
After the war taxation was reduced, and most of the 
excise duties were repealed; but the expenditures re- 
mained so much larger than they had been in i860 that 
the taxes on spirits, beer, and tobacco had to be retained, 
and they have now become a permanent part of our rev- 
enue system. In 191 1 the internal revenue receipts aggre- 
gated $322,526,000. 1 

Our internal taxes are collected by means of stamps 
which must be affixed to all packages containing the 
dutiable articles, in such a manner that the Machinery of 
stamps will be destroyed when the goods are collectlon - 
opened for consumption. In addition, producers of these 
articles are subject to a certain amount of supervision. 
The service is now efficient, and there is not much evasion 
except in mountainous districts of the South and certain 
large cities, in which spirits are sometimes illegally dis- 
tilled with the comparatively simple and inexpensive ap- 
paratus that can be employed. For a good many years, 
however, after the tax on spirits was introduced in 1862, 
there was a large amount of evasion, and at one time 
corruption within the internal- revenue service assumed 
such proportions as to cause a national scandal. 

During the late war with Spain the rates imposed on beer 
and tobacco were largely increased and some ad- , . 

& J Conclusions 

ditional articles were taxed, but these duties have concerning 

. excise taxes. 

since been repealed. The taxes now levied upon 

liquors and tobacco supply a large revenue in time of peace 

1 In detail the receipts were: from spirits, $155,280,000; from beer 
and ale, $64,368,000; from tobacco, $67,006,000; oleomargarine, playing 
cards, mixed flour, renovated butter, $1,735,000; from the tax on net 
income of corporations, $33,511,000; miscellaneous, $626,000. 



356 GOVERNMENTAL REVENUES 

and a few other articles can furnish a considerable addi- 
tional income if it should ever be needed. Like customs 
duties, they are regressive, and, therefore, unjust unless 
other taxes are laid upon wealth or income in order to 
compensate for the inequality of the excise system. Yet 
neither our own nor any other country can dispense with 
the large sums now derived from taxes on consumption; 
and the chief thing that commends excise duties, like cus- 
toms, to general favor is that they enable a government to 
pluck the largest amount of feathers with the smallest 
amount of squealing. 

This ease of collection is due to the fact that such taxes 
are concealed in the prices which citizens pay for commod- 
Easeof ities, and are collected in small amounts upon 

collection. a i ar g e nU mber of purchases. The collection 
of poll, property, or income taxes requires the presenta- 
tion of a formal demand for a considerable sum of money, 
which the payer cannot always spare without more or less 
inconvenience. It is easier for the average person to pay, 
a few cents at a time, a larger tax that is collected by cus- 
toms or excise, than to meet a direct demand for the pay- 
ment of other taxes. At the same time, however, account 
must be taken of the further fact that the so-called in- 
direct taxes, like customs or excise, for the very reason 
that they are less felt, lead the people to display less interest 
in the expenditure of the public money. This has caused 
a vast amount of extravagance in our national expenditures, 
and will continue to do so. Good citizenship, which im- 
plies a keen interest in all the details of public affairs, 
seems to be promoted more effectually by a system that 
places at least a part of the burden of taxation directly 



FEDERAL TAXATION IN THE UNITED STATES 357 

upon the shoulders of the taxpayer, instead of concealing 
it in the prices that he pays for articles of common con- 
sumption. 

§ 247. The Civil War led to the establishment of many 
duties upon business or legal transactions in which 
written instruments were employed ; and again Taxe s on 
in 1898 stamp taxes were levied upon bills of transactions - 
exchange, transfers of stocks and bonds, bills of lading, 
bank checks, telegraph messages, express receipts, and 
some other objects. In other countries transaction taxes 
form a part of the permanent revenue system; but, with 
us, they have been reserved for employment in special 
emergencies. If additional income must be had, the use 
of such, a resource is legitimate; but, on purely economic 
grounds, the taxation of transactions is not to be com- 
mended. It is next to impossible to graduate these taxes 
according to the amount of the transaction, except in a 
few cases ; so that the burden cannot be equitably distrib- 
uted. Then, too, they have the effect of interfering with 
the normal course of business, since they oblige taxpayers 
to avoid so far as practicable the transactions upon which 
duties are laid. When multiplied unduly, they become ex- 
tremely objectionable ; and it is fortunate that this country 
has been able to reserve them for serious emergencies. 

§ 248. During the Civil War Congress was obliged to 
establish an income tax, which, in 1866, yielded the sum 
of $72,982,000. Up to that time this form of Taxation of 
taxation had been used by a few states without incomes - 
much success, 1 but had never been tried by the national 

1 Wisconsin established a state income tax in 191 1, which went into 
very successful operation in 191 2, yielding about $3,500,000. 



358 GOVERNMENTAL REVENUES 

government. The federal tax was discontinued in 1872, 
and thereafter taxation of incomes was practically unknown 
in the United States. In 1894, in order to obtain addi- 
tional revenue and equalize the burden of taxation, Con- 
gress established another tax upon incomes, exempting 
all of less than $4000; but before it could go into opera- 
tion, this law was pronounced unconstitutional by the 
Supreme Court. 

The federal Constitution requires that representatives 

and direct taxes shall be apportioned among the 

several states "according to their respective 

of the numbers," and the Court decided that the 

Constitution. . J ,. , , , ,, r , -, 

income tax was a direct tax and therefore could 
be levied only by apportionment according to the rule 
the Constitution prescribed. Congress had attempted 
to levy an apportioned direct tax only three times, the 
last one being levied in 1861, and it was evident in 1895 
that the various states differed so widely in respect to 
wealth that Congress would never again apportion a 
tax according to population. Therefore the decision of 
the Supreme Court that an income tax was a direct tax 
made it apparent that, if the taxing power of the federal 
government was not to be seriously and even dangerously 
limited, the Constitution of the United States would have 
to be amended. An amendment conferring upon Con- 
gress power to levy an income tax, without apportioning 
it according to population, was finally adopted by Con- 
gress in 1909, and ratified by the necessary number of 
states early in 1913. Acting under the authority thus 
granted, Congress proceeded immediately to frame a 
law imposing a tax upon incomes. At the time of writ- 



FEDERAL TAXATION IN THE UNITED STATES 359 

ing, it is not known what the final provisions of this meas- 
ure will be ; but it proposes to impose a tax upon incomes 
in excess of $3000. Incomes not exceeding $20,000 are 
to pay a tax of one per cent ; and larger incomes are subject 
to higher rates, until upon the excess of any income above 
$100,000 the rate rises to four per cent. 

The experience of other countries shows that income 
taxes find increasing favor as just and lucrative sources 
of public revenue. In Great. Britain and else- 
where such taxes work with increasing ease and 
certainty the longer they remain in operation. They 
correct the inequality caused by indirect taxes levied 
upon consumption, and are an invaluable resource in 
time of emergency. It is not likely that the federal in- 
come tax, once established in the United States, will 
ever be abandoned. 



III. State and Local Taxation in the United States 

§ 249. American states, counties, cities, and towns 
have long derived most of their revenue from the general 
property tax, which is supposed to be levied The general 
upon all the property, both real and personal, P r °P ert y tax - 
in the possession of the taxpayers. In 1902 the total 
amount of the state and local receipts was $934,629,000; 
and of this sum, taxes on property yielded about seventy- 
five per cent. 

There are differences in the methods of administering 
the tax, but the laws of various states require 

. Administra- 

the assessors to make an exhaustive enumera- tionoftne 

tax 

tion and valuation of all kinds of taxable 



360 GOVERNMENTAL REVENUES 

property. Generally, too, notably in the case of personal 
property, taxpayers are called upon to make detailed 
statements of their possessions ; and often this must be 
done under oath. The assessors have power to correct 
these declarations whenever there is reason to suppose 
that a full disclosure has not been made ; while the tax- 
payer can appeal to higher officials, or eventually to the 
courts, for rectification of erroneous assessments. Prop- 
erty is supposed to be rated at its full value, and the tax 
raised for state purposes is levied among the counties or 
other local units in proportion to the respective valuations 
of their taxable property. To the quota which each com- 
munity must raise for state purposes, the sums needed 
for local use are added, and the total is then assessed 
upon taxable property at a rate which will bring in the 
amount of money required. 

In its actual operation the general property tax causes 
great inequality in the distribution of the tax levied for 
unjust appor- state purposes. Each board of local assessors 
the n p™perty has a strong inducement to undervalue the tax- 
tax- able property in its own district, because by 

such a course the amount of the state tax apportioned to 
the locality will be reduced. The result is that property 
is almost never rated at its full value ; while the assessed 
valuation may be only ten or twenty per cent of the true 
valuation in some sections, and as high as eighty or ninety 
per cent in others. It follows necessarily that the burden 
of state taxation is distributed most unjustly among the 
various local units. To remedy this difficulty state 
boards of equalization have been formed, and authorized 
to correct these inequalities of apportionment. But this 



STATE AND LOCAL TAXATION 36 1 

could be done only by an actual revaluation of all the 
property of the state; and the boards of equalization, 
at the best, can merely proceed by rough guesswork. 
Recently permanent tax commissions have been estab- 
lished in some states, and have been given supervisory 
powers over local assessors, by which they have secured 
a fairer distribution of state taxes. 

A second cause of the grossest injustice is the failure 
of this tax to reach personal property. A large part of 
the wealth of a modern community consists its failure to 
of corporation stocks and bonds, mortgages, sonli prop- 
notes, book accounts, and other forms of erty - 
intangible personalty that easily escape the sharpest 
investigation of the assessors. Moreover, these officials 
are usually elected by the votes of the men whom they 
have to assess, and they are not inclined to adopt very 
vigorous means of discovering the less tangible property 
of the voters. Most of the personal property that is 
actually reached consists of stock in trade, machinery, 
and live stock or other farm capital. In 1896 nearly 
two thirds of the personalty taxed in Massachusetts 
consisted of tangible goods of this character. In 1850 the 
total assessed valuation of personal property in all the 
states was $2,125,000,000, while real estate was valued 
at $3,899,000,000. In 1902 the personalty was assessed 
at only $8,923,000,000, while realty was assessed at 
$26,415,000,000. It will be noticed that in 52 years 
the assessed valuation of personal property had increased 
by only $6,798,000,000; while that of real property in- 
creased by $22,516,000,000. Now it is a well-known 
fact that during this period there has been a very great 



362 GOVERNMENTAL REVENUES 

increase of personal property, especially in its less tangible 
forms. Yet its assessed valuation now forms a smaller 
proportion of the total property taxed than was the case 
in 1850. In the state of New York the proportion of 
personal property has constantly decreased, until nine 
tenths of the burden of taxation falls upon real estate; 
while in the city of Brooklyn, in 1895, personal property 
bore less than two per cent of the total tax. In New York 
the richest men in the country are assessed for only a few 
hundred thousand dollars of personal property, when 
their known investments in corporate securities yield an- 
nual incomes that amount to millions. It may be stated 
as a general principle, therefore, that the taxation of 
personal property "is in inverse ratio to its quantity"; 
and that "the more it increases, the less it pays." An 
inevitable result of this is that state taxation falls with 
undue weight upon the country districts, where there 
is little intangible wealth, and personal property exists 
in the form of household goods, live stock, and farm 
implements, none of which can hope to escape the 
assessor. 

One other abuse arising from the present property 

taxes must not be overlooked. While all real estate can 

easily be found by the assessor, the valuations 

Unjust valua- J 

tions of real of different properties are often most unequal. 
As has been seen, undervaluation is the general 
rule ; and it is probable that, throughout the country, 
the assessment of real property does not exceed one half 
of its actual value. The systematic undervaluations 
that prevail open the door to gross abuses in some of our 
large cities, where the most valuable lots and buildings 



STATE AND LOCAL TAXATION 363 

are sometimes assessed much more lightly than smaller 
properties. Thus in Chicago, a few years ago, it was 
found that seventy of the choicest pieces of real estate 
were assessed at less than nine per cent of their true value ; 
while eighty small estates, worth $4000 and less, were 
assessed at almost sixteen per cent of the actual selling 
price. 

But we cannot stop even here in our statement of the 
evils that attend the present administration of the property 
tax. Existing laws offer to taxpayers terrible „ 

> r J Demoraliza- 

inducements to commit frauds. When each tion caused 
citizen is compelled to declare under oath 
the full value of his property, perjury is the usual result ; 
for an honest man, who desires to pay all that is justly 
due from him, knows that, if he tells the whole truth, he 
will have to bear two or three times his fair burden. Thus 
our present system punishes honesty with a double load 
of taxes, and allows the dishonest and unscrupulous tax 
dodger to escape. 

Our general property tax has been shown to be largely 
a tax upon real estate, since most personal property, 
except that of a tangible form, escapes the conclusions 
assessors. In its apportionment there are ^property 
the grossest inequalities between different tax - 
towns and counties, while between individual citizens 
its burdens are often distributed without the remotest 
approach to justice. More than this, it has become a 
fruitful source of demoralization, and is systematically 
educating our people in habits of fraud and perjury. In 
theory the tax is unjust as a main source of public revenue, 
since property is not the best measure of ability ; and in 



364 GOVERNMENTAL REVENUES 

practice "the general property tax as actually adminis- 
tered is beyond all doubt one of the worst taxes known 
in the civilized world." It has been abandoned in most 
other countries as a principal form of taxation, and is 
condemned by practically all students of finance. - 

§ 250. Many of our American commonwealths levy 
poll or capitation taxes. These are imposed at a uni- 
form rate, as $2 per poll, upon all males between the 
ages of 20 or 21 and 45 or 60. They are poorly col- 
lected, and are usually evaded by all persons 

Poll taxes. ' J j r 

who do not have to pay taxes upon property. 
The total receipts, therefore, are small. In a few states 
payment of a poll tax has been a condition precedent to 
voting, with the result that each political party paid the 
taxes of many of its voters, and corruption necessarily 
followed. The poll tax has been abandoned in most 
civilized countries, and must be viewed as an antiquated 
financial expedient. It is, moreover, unjust in its opera- 
tion, since it exacts equal contributions from all, regard- 
less of the different abilities of taxpayers. 

§ 251. The failure of the general property tax to reach 
the stocks and bonds of corporations has led various 
corporation " states to adopt a much more successful ex- 
taxes, pedient, the taxation of the corporations them- 
selves ; and as the number of business corporations has 
increased, corporation taxes have become increasingly 
important in state finance. It is hardly necessary to 
add that the reason for the success of the new method 
of taxing corporate property is that it is far easier to deal 
directly with a corporation than to discover and assess 
its securities in the hands of individual holders. 



STATE AND LOCAL TAXATION 365 

In its usual form the corporation tax applies to special 
kinds of companies, such as those engaged in banking, 
insurance, railway transportation, or the tele- • 

graph and express businesses. Banks are com- poration 
monly taxed upon their capital stock, the 
corporations being required to withhold the amount of 
the tax from the dividends paid to the stock holders; 
and, in addition, they may be taxed locally on their real 
estate. Railroads are taxed in a great variety of ways, 
as upon their gross earnings or the value of their outstand- 
ing securities. When a road operates lines in different 
states, the tax paid in any one is levied upon the amount 
of earnings or securities that corresponds to the proportion 
which the mileage operated in that state bears to the total 
mileage of the company. Sometimes these special taxes 
on corporations are in lieu of all others, state or local ; 
while in other cases the real estate and other tangible 
property may be taxed locally, and a tax upon the balance 
of the property may be paid into the state treasury. In 
some cases the whole tax is reserved for state purposes, 
and in others a considerable part is distributed among 
the local governing bodies. 

Pennsylvania and New York have established general 
corporation taxes which apply, with certain exceptions, 
to all companies doing business within their Thegeneral 
borders ; while Massachusetts and a few others corporation 

tax. 

have taxes that apply to domestic corpora- 
tions. The diversity of practice is so great that it is 
impossible to enter into a discussion of details ; and we 
shall have to leave the subject with the general remark 
that it would seem desirable to replace special taxes with 



366 GOVERNMENTAL REVENUES 

general laws, which, while applying to all corporate enter- 
prises, should vary the methods of procedure so as to 
secure the best result in each case. If the idea of reach- 
ing securities in the hands of the holder is to be given 
up, and there is every reason why it should, all corporate 
enterprises should be brought within some general scheme 
of taxation by which they would be adequately taxed 
once, and once only. The proceeds could be divided 
between state and local authorities in such manner and 
proportions as seem advisable. 

The revenue now derived from corporations by some 
of the states is large ; and sufficient in some cases, in 
separation of addition to inheritance and certain other taxes, 
local 6 and t° make it unnecessary to tax property for 
revenues. other than local purposes. It has often been 
proposed to separate absolutely the sources of state and 
local revenues, by abolishing all direct state taxes upon 
property. This plan, it is said, would remove the induce- 
ment for local assessors to undervalue real estate in order 
to reduce the quota of the direct state tax. But experience 
has shown that it is usually unwise to abolish all direct 
state taxation, since when this is done a necessary check 
on state expenditures is lost. Some states that have 
tried the plan of separation have finally been obliged to 
reintroduce the direct state tax, and others are likely to 
be forced to similar action. Nor is separation necessary 
for removing inequality in the distribution of the state 
tax, because permanent tax commissions, such as have 
been established in some states, can secure an equalization 
of burdens if they are given adequate power to supervise 
and control local assessments. 



STATE AND LOCAL TAXATION 367 

§ 252. License taxes upon various business and pro- 
fessional pursuits have been often employed in the United 
States. In times of emergency the federal government 
has made extensive use of them, but it now retains 
only moderate licenses for dealers in malt or License 
spirituous liquors. Practically all of our cities, taxes ' 
however, and many of the states impose license taxes 
upon certain occupations. In the cities of the South 
a very extensive system of business taxes exists, which 
frequently tends to restrict competition from new enter- 
prises and bears with very unequal weight upon the smaller 
establishments. Elsewhere licenses are confined to a 
few occupations, such as those of liquor dealers, peddlers, 
pawnbrokers, and the like, and have other purposes often- 
times than the mere collection of revenue. From a finan- 
cial point of view, liquor licenses exceed all others in 
importance, being oftentimes the source of large revenues 
that may go to the state as well as the local treasuries. 
In Massachusetts and New York, for instance, the share 
received by the state from liquor licenses is a very impor- 
tant item of income. 

§ 253. The inheritance tax, as it is popularly called, 
is imposed "on the devolution of property, whether real 
or personal, whether by will or by intestacy." Theinherit- 
It is extensively employed to-day in Europe ancetax - 
and Australia; and has been introduced, in some form, 
in most of our states. In many of our commonwealths 
only collateral inheritances are taxed, but in most cases 
direct inheritances are also included. The tax has met 
with such general success that its adoption by other states 
seems merely a question of time. 



368 GOVERNMENTAL REVENUES 

In levying the inheritance tax it is customary to exempt 
a certain minimum amount of property from its opera- 
tion, or to exempt entirely bequests for educa- 

Methodsof ' 1 . . 

taxing inher- tional, charitable, or religious purposes. The 

itances. . , • -, . , . 

rate is often progressive, the progression being 
most marked for inheritances passing to collateral heirs or 
persons not related in blood. Administration is not 
difficult, since most estates have to pass through the pro- 
bate court in order to effect a just distribution of the assets, 
so that, with proper provision for gifts passing inter vivos, 
the collection of the tax is fairly certain and inexpensive. 
In this case the imposition of progressive rates can be 
defended because adequate machinery exists for enforc- 
ing payment of the tax. In the younger states the yield 
from such taxes is not very large, but they furnish a 
considerable revenue in the older commonwealths, and 
are a highly desirable form of state taxation. In com- 
bination with corporation and license taxes, the inherit- 
ance tax should be developed to a point that will make it 
possible for the state governments to lighten materially the 
taxation of property. 

§ 254. Our various local governments should derive 
much more revenue than is secured at present from pub- 
Local lie franchises and all other public privileges, 

taxation. There are many indications that this will be 
done in the near future, because the pressure of taxation 
has forced upon the attention of property owners the fact 
that valuable franchises are now given away without ade- 
quate compensation. The receipts from such sources 
would supply a considerable portion of the revenues 
required by our cities. License taxes are also avail- 



STATE AND LOCAL TAXATION 369 

able for local purposes; large receipts already accrue 
from those upon the sale of liquors, but others should be 
employed with moderation. What other local revenues 
may be needed car be provided by taxes upon property 
and, under proper conditions, upon income. 

For the evils of the general property tax certain reme- 
dies have been found during the past decade. State 
control of local assessments is bringing about in some 
commonwealths a better assessment of real estate. The 
taxation of intangible property has been re- Taxation of 
formed in four or five states by introducing, erty°and Pr ° P 
in place of the present tax, a tax levied at the income - 
flat rate of three or four mills upon each dollar of 
the assessed valuation. The lower flat rate has 
yielded more revenue than was formerly obtained, 
and has secured a reasonably full and equal assess- 
ment. Mortgages have been exempted from taxation in 
some states, and in others are now subject only to a 
registration tax payable at the time they are recorded. 
Finally, Wisconsin has introduced, in lieu of other taxes 
on intangible and some other kinds of personal property, 
an income tax which in 191 2 went into successful opera- 
tion. If strict control and supervision by a state tax 
commission are provided, as in Wisconsin in connection 
with the income tax and in Minnesota in connection with 
the three-mill tax on intangible property, there is no reason 
why any commonwealth cannot tax either incomes or 
personal property at a reasonable rate. The encouraging 
feature of the present situation is that there has been a 
great awakening of interest in the subject of taxation, by 
which the inertia of the past is being overcome. The 



37o 



GOVERNMENTAL REVENUES 



next decade will probably witness marked improvement in 
the methods of local taxation employed in the United 
States. 

FOR SUPPLEMENTARY STUDY 

General : Bullock, Selected Readings in Public Finance ; Hadley, 
Economics, 447-484; Nicholson, Political Economy, III, 
254-415 ; Adams, Science of Finance ; Daniels, Public Fi- 
nance; Ely, Taxation in American States and Cities; Pro- 
ceedings of the National Tax Association (1907-1912); Selig- 
man, Essays in Taxation ; Taussig, Principles of Economics, 
Bk. VIII. 






WORKS OF REFERENCE 

[This list includes only the books mentioned in the suggestions 
for supplementary study.] 

Adams. C. C. Commercial Geography. New York, 1901. 
Adams, H. C. The Science of Finance. New York, 1898. 
Adams, T. S. Labor Problems. New York, 1904. 
Bastable, C. F. The Commerce of Nations. London, 1892. 
Bullock, C. J. Introduction to the Study of Economics. Fourth 

edition. Boston, 1913. 

. Selected Readings in Public Finance. Boston, 1906. 

— — . Selected Readings in Economics. Boston, 1907. 
Carver, T. N. The Distribution of Wealth. New York, 1904. 
Cheyney, E. P. Introduction to the Industrial and Social History of 

England. New York, 1901. 
Clark, J. B. The Distribution of Wealth. New York, 1899. 

. The Problem of Monopoly. New York, 1904. 

Commons, J. R. Trade Unionism and Labor Problems. Boston, 

1905. 
Daniels, W. B. Public Finance. New York, 1899. 
Darwin, L. Bimetallism. New York, 1898. 
Dunbar, C. F. Theory and History of Banking. Second edition. 

New York, 1901. 
Ely, R. T. Taxation in American States and Cities. New York, 

1888. 

. Socialism and Social Reform. New York, 1894. 

. Monopolies and Trusts. New York, 1900. 

Ensor, R. C. K. Modern Socialism. London, 1904. 
George, H. Progress and Poverty. San Francisco, 1879. 
Gilman, N. P. Methods of Industrial Peace. Boston, 1904. 
Greene, T. L. Corporation Finance. Third edition. New York, 

1897. 
Hadley, A. T. Railroad Transportation. New York, 1885. 

. Economics. New York, 1896. 

Hamilton, J. H. Saving and Savings Institutions. New York, 1902. 
Hendrik, F. Railway Control by Commission. New York, 1900. 
Jenks, J. W. The Trust Problem. New York, 1900. 
Jevons, W. S. Money and the Mechanism of Exchange. New 

York, 1875. 

371 



372 WORKS OF REFERENCE 

Johnson, E. R. American Railway Transportation. New York, 1903. 

Kinley, D. Money. New York, 1904. 

Malthus, T. R. Essay on the Principle of Population. London, 

1798. Edited by W. J. Ashley. New York, 1895. 
Marshall, A. Principles of Economics. Fourth edition. London, 

1898. 
Mayo-Smith, R. The Science of Statistics : Part I. Statistics and 

Sociology. Part II. Statistics and Economics. New York, 

1895, 1899. 
Meade, E. S. Trust Finance. New York, 1903. 
Menger, A. The Right to the Whole Produce of Labor. London, 

1899. 
Nicholson, J. S. Principles of Political Economy. London, 1893- 

1901. 
Rae, J. Eight Hours for Work. London, 1894. 
Report of the Industrial Commission, Vol. XIX. Final Report. 

Washington, 1902. 
Roberts, E. H. Government Revenue. Boston, 1884. 
Schaffle, A. The Quintessence of Socialism. Third edition. Lon- 
don, 1 891. 
Schloss, D. Methods of Industrial Remuneration. Third edition. 

London, 1898. 
Seager, H. R. Introduction to Economics. New York, 1904. 
Seligman, E. R. A. Essays in Taxation. New York, 1900. 
Shaler, N. S. Nature and Man in the United States. New York, 

1891. 
Shaw, A. (Editor). The National Revenues. Chicago, 1888. 
Shearman, T. G. Natural Taxation. New York, 1895. 
Smith, A. Inquiry into the Nature and Causes of the Wealth of 

Nations. London, 1776. Edited by E. Cannan, with Intro- 
duction and Notes. New York, 1904. 
Sumner, W. G. Protectionism. New York, 1885. 
Taussig, F. W. The Tariff History of the United States. New 

York, 1888. 

. Wages and Capital. New York, 1896. 

. Principles of Economics. New York, 191 1. 

The American Railroad. Second edition. New York, 1897. 

Vandervelde, E. Collectivism. Chicago, 1901. 

Webb, S. and B. Industrial Democracy. London, 1897. 

White, H. Money and Banking. Second edition. Boston, 1902. 



INDEX 



[The references are to page numbers.] 



Act of 1873, relating to coinage, | Boycott, 313 



159; false charges concerning, 

159-160; of 1906, relating to 

railroads, 222. 
Agricultural resources of the United 

States, 32-33. 
American Federation of Labor, 306. 
Arbitration, voluntary, 31 5-31 6; 

compulsory, 316-318. 
Assessments, special, 346-347. 

Balance of trade, 226 ; the theory 
or, 234-235. 

Banks and the check system, 124- 
125; bank notes, 128, 151 ; de- 
posit banking, 149-150 ; bank 
discount, 150; banking opera- 
tions illustrated, 151-155 ; state 
banking in the United States, 155— 
156 ; the national banks, 156-158. 

Barter, difficulty of, 116. 

Bill of exchange, 125-126. 

Bimetallism, in the United States, 
158-159; demonetization of silver, 
159-160; national vs. interna- 
tional bimetallism, 162; arguments 
for international bimetallism, 162- 
165 ; opposing arguments, 165— 
166. 

Birth and death rates, 39. 

Black-list, 313. 

Bland- Allison Act, 161. 

Boards of equalization, 361. 

Boehm-Bawerk, E. von, on socialist 
theory of value, 336. 

Book credits, 123. 



Brassage, 120. 

Bullion and money, 132-133. 

Bureau of Corporations, 193. 

Capital, a factor of production, 45 ; 
denned, 46 ; concrete forms of, 
47-49 ; fixed and circulating, free 
and specialized, 49-50 ; formation 
of, 50-51 ; abstinence necessary 
for formation of, 51-53 ; facilities 
for saving, 53-54; capital and 
interest, 262-270. 

Cereals, production of, in United 
States, 33. 

Clearing houses, 124-125. 

Closed shop, the, 310-31 1. 

Coal, production of, in United States, 

33-34- 

Coinage, 119; free coinage, 119; 
gratuitous coinage, 119 ; coins of 
the United States, 120. 

Competition, defined, 100 ; two 
forms of, 100 ; commercial and 
industrial, 105 ; failure of, 112. 

Competition of markets, 213-214. 

Comptroller of the Currency, 156. 

Concentration in production, 83-84 ; 
economies of, 84-87 ; opposing 
forces, 87-90 ; conclusion con- 
cerning, 91. 

Conciliation, 314-315. 

Consumption of wealth, defined, 1 3 ; 
final and productive consumption, 
13-14 ; laws of consumption, 14- 
21 ; statistics of, 21-27. 



373 



374 



INDEX 



Continental paper money, 145, 147. 

Cooperative production, 60, 321-323. 

Corporation stocks and bonds, 62-64. 

Corporation taxes, 364-366. 

Corporations, 60; defined, 61 ; 
growth of, 61 ; powers of, 61-62 ; 
securities, 63-64 ; limited liability, 
64-65 ; advantages of, 65-66 ; 
accounting, 67-69; promotion of, 
69-70; irresponsible management 
of, 70-72. 

Cost of production, under static 
conditions, 92 ; under dynamic 
conditions, 93-95 ; analysis of, 
106-108 ; varying costs of produc- 
tion, 1 08-1 10. 

Cotton, production of, in the United 
States, 23- 

Credit, defined, 123 ; book credits, 
123 ; promissory notes, 123 ; the 
check and clearing system, 124- 
125 ; the bill of exchange, 125- 
126 ; foreign bills of exchange, 
126-128 ; bank notes, 128; effect 
of, upon prices, 134-136; bank 
credits, 149-158. 

Custom, affects prices, 112. 

Customs duties, 240-241, 352-354. 

Demand, defined, 101; the law of, 
18-19; elasticity of, 19, 103. 

Discriminating railway rates, 214- 
215. 

Distribution of wealth, 255; the 
simplest form of, 258 ; complex 
form of, 258-259; the employer's 
place in, 259-260 ; the problem 
of, 260 ; interest, 261-270 ; wages, 
271-279; rent, 279-291 ; profits, 
291-296; attempts to alter the 
present distribution, 324-343. 

Division of labor, 55 ; advantages 
of, 56; disadvantages of, 57. 

Division of occupations, 55. 



Dollar, history of, in United States, 

120, 158-161. 
Domains, public, 345. 

Economic order of consumption, 
16-18. 

Economics, defined, 4 ; its deriva- 
tion, 5 ; its relation to other sci- 
ences, 6; its divisions, 7-8; its 
scope and value, 9. 

Engel's law, 21-22. 

Entrepreneur, functions of, 59 ; 
position of, in distribution, 259- 
260. 

Exchange, underlies the division of 
labor, 58 ; advantages of, 97-98. 

Excise duties, 354-357. 

Exports from the United States, 227; 
distribution of, 227-228. 

Extractive industries, 1-2. 

Factors of production, 32 ; organi- 
zation of, 58-60. 

Factory system, 82-84. 

Federal taxation in the United States, 
352-360. 

Fees, 346. 

Fiat theory, 121, 144-145. 

Fines, 346. 

Fixed and variable expenses, 1 13- 
114, 172-173- 

Foreign exchange, 126-128; the 
rate of, 127. 

Free trade, effect of, 245-247. 

Freight charges and the foreign ex- 
changes, 232-233. 

" Friendly agreements," 180. 

General price levels, changes in, 
129-130; methods of measuring, 
130. 

General property tax, 359-364. 

George, Henry, advocate of the 
single tax, 324-326. 



INDEX 



375 



Gold and silver, production of, in the 
United States, 34-35 ; have dis- 
placed other forms of money, 1 1 7— 
118; changes in world's output 
of, 131-132; cost of production 
of, 133 ; territorial distribution of, 
140-142. 

Gold monometallism, 159-160; ar- 
guments for, 165-166. 

Government paper money, 143 ; 
alleged advantages of, 143-145 ; 
the case against, 145-146 ; in the 
United States, 146-149. 

Granger laws, 217-218. 

Greenbacks, 147-149. 

Gresham's law, 136-140. 

Hadley, A. T., on effect of immi- 
gration, 44-45. 

Hamilton, Alexander, on American 
manufactures, 252. 

Holding company, 72. 

Household and social economy, 4-5. 

Human needs, the starting point of 
economic inquiry, 10 ; the increase 
and diversification of, 11. 

Immigration, influences the move- 
ment of population, 41-42; eco- 
nomic effects of, in the United 
States, 42-45. 

Imports of the United States, 227 ; 
distribution of, 227-228. 

Income, national, 255 ; real and 
money income, 257-258. 

Income taxes, 357-360. 

Index numbers, 129-130. 

Industrial combinations, see Mo- 
nopoly." 

"Industrial Revolution," 31. 

Industries, public, 345-346. 

" Infant-industry " theory, 248. 

Inflation, 145-147. 

Inheritance taxes, 367-368. 



Interest, nature of, 261-262 ; rate 
of, depends on supply and demand, 
262-263 '■> the supply of capital, 
263-266 ; equalization of supply 
and demand, 267 ; various classes 
of loans, 267-268 ; tendency of 
interest rate to decline, 268-269 ; 
short-time loans, 269-270. 

International movements of capital, 
231-232. 

International trade, of the United 
States, 226-229 ; in barter, 229- 
230; this fact explained, 230-231; 
various kinds of international 
transactions, 231-233 ; balance of 
trade, 234-235 ; is based on rela- 
tive advantages of production, 
235-239 ; the restriction of, 240- 

253. 
Interstate Commerce Law, 203, 219- 

224. 
Iron law of wages, 333, 337. 
Iron ore, production of, in United 

States, 34. 

Joint agreement, 314-315. 
Knights of Labor, 305-306. 

Labor, economic significance of, 
36 ; causes affecting efficiency of, 
37-38 ; a commodity, 297 ; a 
peculiar commodity, 297-300 ; 
labor legislation, 300-304 ; labor 
organization, 304-318; relation 
of labor to product, 318-323. 

Labor cost, 272. 

Labor legislation, in England, 300- 
301 ; in the United States, 301 ; 
its constitutionality, 301-303 ; its 
economic aspects, 303-304. 

Labor organizations, growth of, 305; 
trade unions, 305 ; Knights of 
Labor, 306 j American Federa« 



376 



INDEX 



tion of Labor, 306 ; objects of 
labor organizations, 306-308 ; ad- 
vantages of, 308-309 ; the stand- 
ard wage, 309-310 ; the closed 
shop, 310-31 1 ; relation to out- 
put, 312 ; industrial warfare, 313- 

318. 

Land nationalization, 324-330. 

Large fixed capitals, their effect on 
prices, 1 1 3-1 14. 

Latin Monetary Union, 160. 

Law of demand, 18-21. 

Law of diminishing returns, from 
land, 74-78 ; from labor and 
capital, 78 ; significance of, 79- 
82 ; its relation to the growth of 
rent, 284-287. 

Law of economy in organization, 
82-91. 

Law of supply, 91-92 ; under static 
conditions, 92-93 ; under dy- 
namic conditions, 93-95 ; increas- 
ing and decreasing marginal cost, 

93-95- 
Law of the variation of utility, 14-16. 

Legal tender, 121. 

License taxes, 367-368. 

Loans, call and time, 152; various 

classes of, 267-270. 
Local taxation in the United States, 

368-370. 
Lockouts, 313. 
Lotteries, public, 346. 

" Magic-fund " delusion, 348. 
Malthusian theory of population, 

39-4L 

Man, a factor of production, 35. 

Mann-Elkins act, 223. 

Manufacturing industries in the 
United States, 2-3, 252. 

Market, defined, 99 ; extent of mar- 
kets, 99-100. 

Market value, 98-103. 



Marshall, A., on value, no. 

Mill, J. S., on profits, 294 ; on land 
nationalization, 324-325. 

Mineral resources of the United 
States, 33-35. 

Money, purchasers measure sacrifice 
in terms of, 18; origin of, 116; 
the medium of exchange, 117; 
the money metals, 118 ; coinage, 
1 1 9-1 20 ; the fiat theory, 1 2 1-1 22 ; 
other functions of money, 122 ; 
credit substitutes for money, 123- 
128; the value of money, 128- 
136 ; Gresham's law, 136-140 ; the 
territorial distribution of, 140-142; 
government paper, 143-149 ; 
monometallism and bimetallism, 
158-166. 

Monopoly, defined, 167; is seldom 
absolute, 167-168; legal monopo- 
lies, 169; natural monopolies, 
169— 171 ; capitalistic monopolies, 
171; monopoly value, 171— 174; 
public policy with respect to 
natural monopolies, 174-180; 
various forms of capitalistic mo- 
nopolies, 180-183 ; arguments in 
favor of combination, 183-187; 
these arguments critically con- 
sidered, 184-187 ; recent move- 
ments in the United States, 187- 
188 ; monopoly and privilege, 
188-189 ; influence of the tariff, 
1 89-1 9 1 ; trusts and prices, 191- 
192 ; remedies for capitalistic 
monopolies, 191-196. 

National banking system, 156-1580 

National income, 255 ; limited by 
capital, 256 ; real and money in- 
come, 257-258. 

Natural condition affecting Ameri 
can industry, 32-35. 

Nature a factor of production, 32. 



INDEX 



377 



Non-competing groups among labor- 
ers, 275-277. 
Normal value, 103-111. 

Occupations, statistics of, 1-4. 
Ocean freight, 232. 

Partnership, 60. 

Personal and professional service, 3 

Piece wages, 27 1-^72, 318. 

Poll taxes, 362-363. 

Pools, 180-181; railway, 202-203. 

Population, natural increase of, 39- 

41. 
Price, defined, 99 ; changes in 

general level of prices, 129- 

130. 
Production of wealth, defined, 29 ; 

stages in development of, 29-31; 

a social process, 55 ; laws of, 

74-96- 
Products and by-products, the value 

of, 114-115. 
Profit defined, 280, 291 ; gross and 

net profits, 291-292 ; marginal 

producer receives no profit, 293- 

294 ; the amount of profits, 294- 

295 ; profits a personal income, 
295 ; profits a surplus, 295-296. 

Profit sharing, 319-321. 

Progressive taxation, 351-3520 

Progressive wages, 3 18-3 1 9. 

Promissory note, 123. 

Proportional taxation, 351-352. 

Prosperity, test of, 23-27. 

Protective tariffs, 242-253. 

Public ownership of natural monop- 
olies, its advantages, 1 76 ; its 
disadvantages, 177 ; the lesson 
of experience, 177-178; conclu- 
sion, 178-179 ; of railroads, 224- 
225. 

Public revenue, 345-370. 



Railroads, construction of, in 
United States, 198-199 ; charac- 
ter of early roads, 199 ; railway 
cooperation, 199 ; trunk lines, 
200; railroad systems, 200-201 ; 
growth of competition, 201-202 ; 
progress of combination, 202-208; 
methods of railway consolidation, 
204-205 ; results of consolidation, 
205—206; reasons for consolida- 
tion, 206-208 ; railway rates, 208- 
216; freight rates, 209-210; rate 
making, 210; different classes of 
traffic, 211; discriminating rates, 
212-215; public control of rail- 
roads, 216-225 > early policy to- 
ward railroads, 216; the public 
character of the industry, 217; 
state commissions, 218-219; In- 
terstate Commerce Law, 219—222 ; 
our future policy, 223-225. 

Rent, defined and explained, 280- 
281 ; not to be confused with 
interest, 281-282; depends on 
demand for land, 282 ; various 
classes of rents, 282-284 '■> ren t 
and diminishing returns, 284-287; 
not a cause of high prices, 287- 
289 ; as an unearned income, 
289-291. 

Revenue tariffs, 241-242. 

Risk, affects rate of interest, 268. 

Saving and savings institutions, 53- 

54- 
Seigniorage, 120. 

Sherman Anti-Trust Act, 181-182. 
Shop councils, 314. 
Silver movement in the United 

States, 161-162. 
Single tax, 324-326 ; criticism of, 

326-328 ; conclusion, 328-330. 
Fmith, Adam, on the scope of the 

science of economics, 8 ; on divi- 



378 



INDEX 



sion of labor, 56, 58 ; on corpo- 
ration management, 89-90 ; on 
taxes, 349. 

Social sciences, enumerated, 6. 

Socialism, denned, 330-331 ; its his- 
tory, 331 ; modern basis of, 332- 
333 ; alleged tendency toward, 
334 ; supposed advantages of, 
3 2 4-335 5 criticism of, 335"343- 

Sociology, 6-7. 

Specific and ad valorem duties, 240- 
241. 

Stages in development of produc- 
tion, 29-31. 

Standard of living, defined, 41 ; 
further considered, 275-277 ; its 
relation to wages, 277-J79. 

Standard wage, the, 309-310. 

State taxation in the United States, 
360-369. 

Stock exchanges, 66. 

Strikes, 313-316. 

Supply, defined, 101-102 ; the laws 
of, 91-96. 

Tariff on imports, its relation to the 
growth of trusts, 1 89-191; speci- 
fic and ad valorem duties, 240- 
241 ; revenue and protective tariffs, 
241-242 ; effect of, 242-245 ; 
present and future effect of pro- 
tection, 247-248 ; the burden of 
protective duties, 249 ; the tariff 
and wages, 250-252 ; the tariff 
and the diversification of industry, 
252-253 ; our future policy, 253. 

Taxes, defined, 347-348 ; the just 
distribution of, 349-352 ; the 
various taxes employed in the 
United States, 352-370. 

Time wages, 271-272, 318. 

Trade unions, 305-306. 



Transaction taxes, 357. 

Travellers' expenditures and the 
foreign exchanges, 233. 

Trunk lines, 200. 

Trusts, 181-182; the trust move- 
ment in the United States, 181- 
191. 

Undertaker, 59. 

Unearned increment, 289-291, 328- 
329. 

Utilities, include material com- 
modities and personal services, 
11-12. 

Utility, defined, 11 ; four kinds of, 
12 ; marginal and total utility, 15* 

Value, defined, 98-99 ; the deter- 
mination of market value, 100- 
103 ; the equalization of supply 
and demand, 102-103 ; normal 
value, 103-111 ; analysis of cost 
of production, 106-108 ; mar- 
ginal cost of production, 1 10 ; 
exceptions to the theory of normal 
value, 1 1 2-1 15 ; monopoly value, 
171-174. 

Variation of the efficiency of pro- 
ductive forces, 74. 

Wages, in the United States, 250- 
252 ; defined, 271 ; time and 
piece wages, 271 ; labor cost, 272; 
the rate of wages, 272-273 ; the 
demand for labor, 273-275 ; the 
supply of labor, 275-277 ; the nor- 
mal wage, 278 ; the family the 
economic unit, 279. 

Wants, existence and culture, 10 ; 
are satiable, 14. 

Waterways in the United States, 35. 

Wealth, defined, 12-13. 






13. 



SFP" 8 : !9i 



